Thursday, March 3, 2011

Golden Years?

Ronald Brownstein reports in the National Journal, Golden Years?:

One big reason public employees are under siege in Wisconsin and other states is because they now enjoy more secure retirement benefits than most private-sector workers. The question is whether the right way to close that gap is by reducing security for government employees or increasing it for everyone else.

For private-sector workers, retirement security is unmistakably eroding. The change is rooted in the shift from “defined benefit” pensions, under which employers guarantee their workers a fixed payment after retirement, to “defined contribution” pensions, such as 401(k) plans, under which employers commit only to contributing a fixed amount that employees must invest on their own.

In 1985, about four in five workers at medium- and large-sized private firms received a defined-benefit pension, according to federal statistics. Today, less than one-third are covered under such plans. Instead, most workers at large and medium private companies who receive pension benefits at all obtain them in the form of defined contributions. In small companies, defined-benefit plans are virtually extinct—and only about one-third of those workers receive even a defined-contribution retirement benefit.

This replacement of traditional pensions with 401(k)-type plans amounts to a massive shift of risk from employers to individuals. Under defined-benefit programs, employers bear the primary financial risk: They are obligated to provide the benefits regardless of how their investments perform. Under defined-contribution programs, workers invest their own money and suffer if the markets tank, as anyone with a 401(k) discovered in the 2008 meltdown.

But one group of workers has largely avoided this shifting of risk: public employees. Defined-benefit plans still cover fully 87 percent of public employees (compared with the one-third of private-sector workers at larger companies). In fact, the share of public-sector workers with traditional pensions now substantially exceeds the two-thirds of private-sector workers at bigger companies with access to either a defined-benefit or defined-contribution plan.

That advantage creates understandable resentment among workers who have lost such certainty. “The taxpayer who is hurting does not have a defined-benefit pension and is saying, ‘Why should my taxes go up so this other group can have this very generous retirement?’ ” says John Rother, executive vice president of policy at AARP, the giant seniors’ lobby.

Some of the pension benefits that public employees have negotiated are indefensible (particularly those allowing excessively early retirement). And over time, it’s unsustainable for public employees to enjoy so much more retirement security than most of the taxpayers who fund their benefits. But the escalating conflict over whether public employees have won too much retirement security is obscuring the larger issue of whether everyone else has lost too much. “The question is, should we bring everyone down to what we’ve done in the private sector where the level of insecurity is [rising]?” says Alicia Munnell, director of the Center for Retirement Research at Boston College.

Using conservative assumptions, and including all potential sources of income (including Social Security, traditional pensions, home equity, and 401(k) plans), the Center for Retirement Research calculates that fully half of Americans will fail to generate enough postretirement income to approach their preretirement standard of living. The vulnerability is greater for younger than older baby boomers and greater still for Generation X. Those who rely on defined-contribution plans are substantially more exposed than the dwindling number with access to traditional pensions. The overall level of risk, Munnell warns, “is shockingly high.”

The 401(k) has several virtues: flexibility, portability, autonomy. For the vast majority of workers, however, it is not producing enough assets for a secure retirement—either because they didn’t invest enough, made bad investment choices, or simply suffered from market volatility. In all, workers who retire during the next 20 years can expect to replace only about two-thirds of their preretirement income, compared with about four-fifths for their parents’ generation, the liberal-leaning think-tank Demos calculated in a recent study. “It’s a tougher future than we’re expecting; it’s a tougher future than our parents had; and I think it’s going to be demoralizing,” Munnell says.

Public employees need to accept reasonable concessions as states confront big budget deficits. But the impulse to take government workers down a peg might be better channeled toward increasing retirement security for everyone else in fiscally responsible ways.

Most Americans will need to contribute by working somewhat longer. Beyond that, one option is to provide bigger Social Security benefits for lower-income retirees by restraining them for the affluent. Another, as President Obama has proposed, is to establish automatic retirement-savings accounts for workers without pension plans, with matching federal contributions for lower-income savers. These contributions could be funded by limiting the tax break for 401(k) plans, because those deductions most benefit the wealthy (and are projected to cost $360 billion in lost federal revenue through 2015).

Public pensions may be attracting the headlines, but the unraveling of private-sector pension security poses a much greater long-term challenge, even if it lacks a pyrotechnic confrontation to galvanize the media.

Let's be clear on something, taxpayers are not footing the bill for public sector pensions, at least not yet. Workers contribute to their pensions and funds invest these monies on their behalf to be able to pay future liabilities. But because public pensions are guaranteed, if the state doesn't have the funds to make up any shortfall, then taxpayers could be on the hook.

One thing that should be done away with is early retirement. I was talking to a senior federal government employee in Ottawa who told me that he knows of people retiring at 55 after 30 year service and collecting a pension of $100,000 a year. That's a pension for the rest of their life! Alright, these are exceptional cases, but it's ridiculous. If my 79 year old father can still work eight hour days as a psychiatrist, which he fully enjoys, then why should government workers be allowed to retire at 55? We need to instill some common sense and realize that the system isn't going to be able to support these benefits in the future.

As for private sector pension security, Mr. Brownstein is right, it doesn't garner the media's attention but this is what poses the real long-term challenge. If policymakers don't address this problem, then pensions apartheid between public and private sector workers will only get worse.

***UPDATE***

Jack Dean of PensionTsunami.com sent me this comment:
It would appear that you are not following the headlines on PensionTsunami. CalPERS is imposing rate increases on its participating employers over the next three years, and CalSTRS -- which lacks the authority to raise rates in that manner -- is already lobbying the Legislature for a billion or two from the general fund to make up for its losses in the big meltdown.

Local governments throughout the state are in trouble financially, in large part due to increased retirement costs, and it's only going to get worse; read yesterday's stories about Costa Mesa laying off half of its employees.

And as for the union argument that we should REALLY be doing is trying to bring back DB plans in the private sector, well, that's just wishful thinking and a good propaganda line designed to blame greedy businesses for the situation. Unlike governments, businesses operate in the real world and have to respond to market forces and changes (like extended longevity) in order to survive. So DB plans just are not going to make a comeback in the private sector, and they need to be phased out in the public sector for all the same reasons and more.

I could keep making points, but I have to get working assembling today's headlines. I appreciate your work, but think you are not familiar with the political nitty gritty of public employee DB plans and how they truly are a rape of the taxpayers (see the stories this week about the 200 California government agencies that rushed to sweeten benefit formulas in spite of impending financial doom).
And Bill Tufts of Fair Pensions For All sent me David Johnston's article in the Montreal Gazette, Public-sector pensions a Canada-wide problem:

The pension-plan problems of Montreal Island municipalities reflect Canada-wide affordability issues with such public-sector plans that need urgent fixing, a Canadian pension reform advocate says.

Taxpayers can't afford current pension entitlements for public-sector workers, and governments need to pass special laws to reduce future accruals, says Bill Tufts, a Toronto human-resources consultant.

But to be fair to public-sector workers, says Tufts, who is writing a book on the public-sector pension challenge, Canadians must respect the vested entitlements that the workers have accrued to date.

Tufts is the founder and curator of a national blog titled Fair Pensions for All that is one of North America's leading aggregators of public-sector pension news in the developed world.

Among other things, he has been following recent political developments in the state of Wisconsin, where the legislature has been the target of demonstrations by public-sector workers fighting proposed remuneration rollbacks.

Tufts says the recent revelation by Westmount Mayor Peter Trent that he and Montreal Mayor Gérald Tremblay plan to go to Quebec City next month to ask Quebec for help to curtail municipal pension benefits is a sign that the issue is percolating north of the border, too.

"Taxpayers are starting to demand changes," Tufts said yesterday. "They see the injustice."

Two-thirds of Canadians don't have private pension plans of their own and resent paying high taxes to support rich public-sector pension plans that are damaging government balance sheets, he says.

Last week, Trent told The Gazette that he and Tremblay want Quebec to pass a special law to cut future pension costs. Trent said current municipal pensioners would not be affected, nor would current municipal employees see any retroactive cuts; however, Trent said current and future employees would see some sort of rollback from what current entitlements provide.

Tufts said the simplest way to proceed would be to introduce special laws that would impose lower future accrual rates on public-sector pensions. Generally, accrual rates in the public sector are about two per cent per annum. That is to say, workers accrue future pension earnings at a rate of two per cent of salary times number of years worked. These so-called defined-benefit pensions are guaranteed by governments, no matter their deficits or debts.

"We see a proposal whereby the accrual rates would be cut in half, so that rather than having a two-per-cent accrual rate, the public sector would see a one-per-cent accrual rate," said Tufts.

"Governments would continue to make the same contributions - and any excess over and above that one-per-cent accrual would go into a defined-contribution plan" - a plan where taxpayers and workers should share the risk of future shortfalls.

Next week, Los Angeles will vote on a ballot measure to trim pensions of police officers and firefighters. But public-sector workers are fighting back, too, and not just in Wisconsin. In Toronto, senior executives of Toronto Hydro are suing the OMERS pension fund, saying their bonuses should treated like salary to calculate their annual accruals.

Tufts said wages in the public sector have been rising two to three times faster than the inflation rate over the past decade, and this is creating new pension inflation for taxpayers - since accruals are based mainly on the average of one's last three years of earnings. In the 1980s, he said, pensions were calculated more on the basis of lifetime average earnings.

In 2007, before the economic downturn, U.S. investment guru Warren Buffett warned: "Whatever pension-cost surprises are in store for shareholders down the road, these jolts will be surpassed many times over by those experienced by taxpayers. Public-pension promises are huge and, in many cases, funding is woefully inadequate. Because the fuse on this time bomb is long, politicians flinch from inflicting tax pain, given that problems will only become apparent long after these officials have departed."

Bill is very concerned about the cost of public sector pensions and he's not alone. There hasn't been a comparable in-depth study in Canada to "The Trillion Dollar Gap," but I'm sure the cost of public sector pensions has ballooned here over the past decade, underscoring the need to introduce pension reforms in Canada as well.

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