Posted on 03/05/2008 5:44:08 PM PST by Kaslin
I partially agree. Absent the subsidization effect of short-termers, the annual cost of a DC plan should be exactly the same as the cost of a DB plan (assuming the same benefit levels and actuarial assumptions -- age, years of service, ROI, etc). Hence, if reduced cost to the State is the objective of a change, transitioning from a DB to a DC plan gives yo absolutely no advantage. In fact, a DC plan, if it were to have the same seniority eligibility terms as a DC plan (i.e. X years of service before participation), the subsidization effect would also be the same in both cases.
I have been trying to get data on pensions for public safety workers.
Did you read the extensive series of articles in the Sacramento Bee a couple of years ago? Perhaps they would make some of their materials available to you (I think they collected much of the public record--after fighting the open records issues). From my recollection, the Public Safety category included anyone working in prisons (inlcuding doctors, clerkes, etc) and a variety of others that benefited from the overly-generous pension benefit amounts. I can dig up some links if you haven't seen it. I think you would find it informative.
You are falling into a cost trap. I have focused on compensation, not costs. The DB plan in Colorado provides employees with a large amount of deferred compensation because the taxpayer is assuming all risks. Essentially, employees have a fixed return investment with a large amount of deferred compensation. Wage indexed securities do not exist.
The DC plan with the same employer contribution level is much less valuable to career employees because the employee must take the risk. The DC plan does not provide deferred compensation. Risk averse employees will need to choose low risk investments.
The problem with the cost trap is that actuarial assumptions cannot be insured. Politicians increase benefit levels as market returns increase forgetting about risk. The cost of the DC and DB plans are not the same. The DB cost must include a large risk component that taxpayers bear when actuarial assumptions are not achieved.
When one adjusts returns for risk, the advantage of the DB plan is clear. In my analysis, the DB plan provided a 4.5 to 6 times the risk adjusted return. With the state of the US economy, risk considerations are a vital part of the plan cost. Public pension agencies use outrageous assumptions to justify high benefits. Public employees should bear the risk of their retirement. DB plans when offered should be designed to provide returns comparable to a guaranteed investment. I believe that the FERS plan is designed in this manner.
No trap. I'm focusing on both.
The DB plan in Colorado provides employees with a large amount of deferred compensation because the taxpayer is assuming all risks. Essentially, employees have a fixed return investment with a large amount of deferred compensation. Wage indexed securities do not exist.
I don't agree with that characterization. Employers accept the responsibility of offering a pension to employees upon retirement entering into a contract of sorts. The employee agrees to work for a dollar now (salary) combined with a dollar later (pension). The employer sets aside money that will fulfill that obligation, assuming that the money will grow over time as it is invested. Those investments can include securities, real estate, bonds, or any variety of things. That set-aside fund may indeed incur some losses, but it will also experience gains. There is both risk and opportunity. Contribution amounts to fulfill the employers obligation will consider the long term rate of return considering both of those factors.
The DC plan with the same employer contribution level is much less valuable to career employees because the employee must take the risk. The DC plan does not provide deferred compensation. Risk averse employees will need to choose low risk investments.
I don't agree with that either. The compensation amount under a DC plan is computed based on the same variables and actuarial assumptions as a DB plan. Theoretically, an individual has the opportunity to earn the same long term rate of return as does the pension fund. In fact, the objective of both would be to make available a target amount of dollars to that employee upon retirement. Whether it is set aside by the company in a DB plan, or put aside in the name of the employee under a DC plan, the end game is intended to be the same.
The problem with the cost trap is that actuarial assumptions cannot be insured. Politicians increase benefit levels as market returns increase forgetting about risk.
Changing benefit levels is a change in the fundamental contract with the employee; it is not a change in actuarial assumptions (as would be return on investment, actual age at retirement, mortality, etc). Now, have politicians (and companies) used accumulated funds in a pension plan, originally set-aside for one purpose, as a piggy bank to fund new benefits beyond those originally prescribed? Absolutely. Those actions, IMO, are a violation of the trust initially established with employees and in the long run often cause an increase in contribution amounts for which taxpayers are left holding the bag. One solution would be to prevent politicians from taking such actions--that seems a whole lot more appropriate than proposing a wholesale change from a DB to a DC plan.
The cost of the DC and DB plans are not the same. The DB cost must include a large risk component that taxpayers bear when actuarial assumptions are not achieved. When one adjusts returns for risk, the advantage of the DB plan is clear.
Well, I've worked on several of these in real life, including studies of whether companies should change from a DB to a DC. The cost is basically the same. The compensation is also generally the same after adjusting for the time value of money. The only way employers have been able to offer such a change, and make it palatable to employees, is to demonstrate that the new plan is equal to, or even more generous, than their existing plan. The amount an employee receives under a DC plan is basically computed using the same variables as would be used under a DB plan.
In my analysis, the DB plan provided a 4.5 to 6 times the risk adjusted return. With the state of the US economy, risk considerations are a vital part of the plan cost.
How many years are you using in performing your analysis? If the economy were booming, would you say that opportunity considerations should also be part of the plan cost?
Public pension agencies use outrageous assumptions to justify high benefits.
I contend it is the politicians who are quick to dole out the benefits, not the pension agencies who act as managers of the funds more than pseudo-philanthropist. Politicians have used funds in various ways to cater to their favorite group to try to gain favor with their policies. When they do this, it is no different than any other misuse of public funds and it should not be tolerated. These situations should be exposed, rectified, and those responsible prosecuted to the greatest extent possible.
Public employees should bear the risk of their retirement. DB plans when offered should be designed to provide returns comparable to a guaranteed investment. I believe that the FERS plan is designed in this manner.
Why have a pension at all, then? If public employees should bear the risk, why not just give them a bigger salary and be done with it--no pension, at all? What seems to get lost in these discussions is the reason for pensions in the first place. It was to offer stability and future income in return for employment. It was a service, offered by an employer. For those who are not able to make intelligent investments (or not interested), the employers offered to do it for them. Under a DC plan, it is basically eliminating that service. It is also opening the door for hoards of not-so-ethical investment managers to sell their "services" to not-so-savvy retirees and deplete their retirement funds. (Have you seen the astronomical increases in elder fraud lately?) My guess is that would just put more pressure on already strained social service programs as more and more seniors join the "indigent" category.
IMO, public employees should be offered competitive a competitive wage and benefit plan, including pensions. A computer analyst with a given set of skills, and given similar job requirements, should be paid comparably by either a public or private employer. If a politician(s) or public employer pension fund is incompetent or crooked in how they manage that fund, I don't think changing the employee/employer relationship is the solution.
The Austrian suggested a pension shift from defined benefit to defined contribution leaving the state in a fiduciary role and provided no details of the definitions. The proposal had the appearance of short term savings, if you didn't look to closely, with little suggestion of the final costs. An Austrian hallmark.
First, of the two, defined contribution is the most expensive in a rising market with matching contributions up to 15% of gross wages not uncommon. As wages skyrocket, so do employer contributions. Further aggravating circumstances, the perception of inflated wages for services rendered, a common mind set in government employment, invites maximum employee participation. After all, it's free money.
Second, at the collection end, defined contributions usually enjoy income tax protections. In this case, the safe harbor shelters billions of dollars annually from the General Fund.
Third, overtime compensation is considered in defined contribution but not in defined benefits. For a correctional officer, that could triple the defined contribution.
Last, the only notable risk to the union member is the market and it's been almost 100 years since the last collapse.
Time to do your homework professor.
You make some careful points. It seems that you have a good knowledge of pensions. You are indicating the conventional wisdom about public employee pensions. I believe that conventional wisdom is fundamentally flawed about public employee pensions. My study, the private sector’s reactions to DB plans, and the unfunded liabilities in many public DB plans is strong evidence that conventional thinking is wrong about public DB plans.
There is a fundamental difference between the usage of assumptions in evaluating DB and DC plans. DB plans such as Colorado PERA are providing a market impossibility. There is no wage indexed security that can be purchased to provide the guaranteed benefits promised by Colorado PERA. The state of Colorado has guaranteed an expected rate of return (8.5%) that simply cannot be guaranteed in the marketplace. If the target assumptions are not met in these DB plans, the taxpayer is at risk. If the target assumptions for evaluating a DC plan are not met, the employee is at risk.
Investments including retirement savings are governed by risk/return tradeoffs. The risk/return tradeoffs offered to public employees in Colorado PERA and similar plans are not attainable in the marketplace. Hence, the promised risk-adjusted benefits to PERA retirees are much higher than DC plan recipients. These greater benefits are huge sums of undeclared deferred compensation.
I have seen many studies comparing DB and DC plans. None of the studies compares risk-adjusted returns. Under some scenarios, DC plans provide higher levels of retirement income. DB plans like PERA provide a high level of retirement income without any risk. The only metric to compare the plans is risk-adjusted return, not just return.
I would agree that plan costs are identical if taxpayers are not subject to unfunded liabilities. The assumptions would determine taxpayer costs. If the assumptions change, contribution rates would increase. However, taxpayers in many states are subject to unfunded liabilities. If the assumptions are not met, the taxpayer must bailout the pensions.
In Colorado and many states, compensation surveys are conducted to ensure that public employees are provided market wages. These surveys deliberately underestimate the value of public employee pensions and overestimate the value of private pensions. The extra deferred compensation provided by DB plans is not counted in the compensation surveys.
Governments can have competent workforces without the extra compensation provided by DB plans. There is no reason that retirement benefits in the public sector should be much higher than the private sector. There is no reason to subsidize early retirement for public employees. If public employers have trouble hiring and retaining employees, compensation should be increased in those areas just like the private sector.
I have had many dealings with the Colorado PERA agency in performing my study. In my opinion, this agency and the entire public employee pension industry is a staunch defender of the indefensible. Every one of these plans would collapse if it were in the private sector without taxpayer bailouts. Politicians are deeply aligned with public employee unions who want compensation not available in the private sector. Politicians are ignorant about pensions, especially about deferred compensation in these DB plans.
I have done plenty of homework on public DB plans. My research is based on the best set of data ever collected about public employee pensions. My study demonstrated the incredible windfall given to public employees in Colorado. This incredible windfall is a taxpayer nightmare. California’s pension plan is roughly comparable to Colorado’s plan so the same situation is roughly true in California.
Retirement compensation in the public sector is much higher than the private sector despite deliberate efforts by public agencies to indicate otherwise. Public employees retire on average at much younger ages with higher retirement income than private sector workers. Many public employees are not subject to the Social Security boondoggle, another huge advantage for the public sector. In my study, the value of the defined benefits to public employees would increase their compensation 25% to 35% on average.
I do not know the specifics of the Austrian’s proposals. I would propose a transition to DC plans similar to the situation in Michigan. In 1997, the Michigan legislature wisely transitioned employees to a new DC plan. There were provisions for long term employees to remain in the DB plan. Public employees in Michigan (except teachers) are in a DC plan, saving the taxpayer huge sums without sacrificing the quality of the public workforce.
The private sector no longer has DB plans like the plans offered in Colorado and California. The private sector fully realizes the enormous cost of these plans compared to DC plans. DB plans like Colorado and California would collapse without massive tax payer bailouts.
The only way to reveal the true cost of DB plans is to privatize them. If state governments were forced to put these plans to competitive bid without any hope of taxpayer bailout, pension costs would skyrocket. The private sector does not offer wage indexed securities so the true cost is difficult to estimate.
There are many studies that demonstrate the inbalance between public and private compensation. Public employee compensation far outstrips private sector compensation in many areas. Retirement compensation including pensions, early retirement medical, and disability are vastly superior in the public sector.
Correctional officers are not denied retirement compensation based on overtime. Correctional officers can contribute to an optional 401K or save independently. You are complaining that you cannot spike your pension even higher with overtime compensation.
Defined benefit pensions have incredible tax advantages. Most importantly, public employees in many places do not pay social security tax. Social security taxes are not sheltered despite that many retirees pay taxes on their social security benefits. Public employees can contribute their social security amount to an optional 401K. Since combined employer/employee pension contributions substantially understate the true cost of the benefits, public employees can effectively shelter contribution levels approaching 50% of their income.
If DB and DC plans were comparable, public employee unions would not scream every time a politician wants to end DB plans. The unions understand the hidden deferred compensation. Unfortunately, politicians and the public do not.
From the above paragraph, this is what I read: Conventional wisdom is wrong and my study demonstrates it. How about you define what you consider "conventional wisdom" to be and then state why you think it is wrong? Otherwise, I really don't understand the point you are trying to make.
There is a fundamental difference between the usage of assumptions in evaluating DB and DC plans. DB plans such as Colorado PERA are providing a market impossibility. There is no wage indexed security that can be purchased to provide the guaranteed benefits promised by Colorado PERA. The state of Colorado has guaranteed an expected rate of return (8.5%) that simply cannot be guaranteed in the marketplace. If the target assumptions are not met in these DB plans, the taxpayer is at risk. If the target assumptions for evaluating a DC plan are not met, the employee is at risk.
Again, too many unsupported statements here. What does the availability, or non-availability of an indexed security have to do with anything? And an actuarial assumption as to rate of return is anything but "guaranteed." It is an assumption. And any variation from that assumption is included in annual adjustments to contribution amounts. As to ROR, from my experience, anything above 8.25% is an overly optimistic assumption but on occasion there are reasons to justify it. You say that if the target assumptions are not met, that the taxpayer is at risk. That is a distorted way of looking at it, IMO. The liability is the liability is the liability--based solely on the benefits. The percentage return does not change the pension obligation (the liability), it only effects the amount to be contributed, and when, to fulfill that future obligation.
Investments including retirement savings are governed by risk/return tradeoffs. The risk/return tradeoffs offered to public employees in Colorado PERA and similar plans are not attainable in the marketplace. Hence, the promised risk-adjusted benefits to PERA retirees are much higher than DC plan recipients. These greater benefits are huge sums of undeclared deferred compensation.
I can't understand what you are saying because I don't know what type of "risk/return tradeoffs" have been offered to Colorado employees. Can you put that in generic terms? I also have no idea what you mean by "undeclared deferred compensation."
I have seen many studies comparing DB and DC plans. None of the studies compares risk-adjusted returns. Under some scenarios, DC plans provide higher levels of retirement income. DB plans like PERA provide a high level of retirement income without any risk. The only metric to compare the plans is risk-adjusted return, not just return.
I don't understand your logic here. Under scenario A (DB), the company is at risk and subject to market fluctuations. Under scenario B (DC), the employee is at risk and subject to market fluctuations. Why do you think there should be an adjustment for risk? Are you arguing that the DC plan, to be comparable to the compensation offered under a DB plan, should be adjusted up or down to compensate for risk? Why?
I would agree that plan costs are identical if taxpayers are not subject to unfunded liabilities. The assumptions would determine taxpayer costs. If the assumptions change, contribution rates would increase. However, taxpayers in many states are subject to unfunded liabilities. If the assumptions are not met, the taxpayer must bailout the pensions.
Again--In a DB plan, the employer is subject to the liability, whether funded or unfunded. The employer is also subject to market fluctuations and actuarial market expectations that are not met (but they benefit from expectations that are exceeded.) Those risks (and opportunities) shift to the employee under a DC environment. Do liabilities ultimately fall on the taxpayer? Yes, with regard to a public retirement fund (just like they would fall on stockholders of a private enterprise). Similarly, if the state messes up a public infrastructure program and gets sued, the taxpayer is on the hook for the liability. That is why we most hold our public servants accountable and if they act irresponsibly they should be booted out and prosecuted, if appropriate. As a side note, I will mention that CalSTRS recently did institute a plan to increase employee contributions to their DB pension fund (I think it begins in 2009).
In Colorado and many states, compensation surveys are conducted to ensure that public employees are provided market wages. These surveys deliberately underestimate the value of public employee pensions and overestimate the value of private pensions. The extra deferred compensation provided by DB plans is not counted in the compensation surveys.
I still don't get where you have concluded that there is "extra deferred compensation" in a DB plan. And I've read lots of those compensation surveys over the years, comparing private employer compensation levels to government employees and I've never seen a deliberate misrepresentation of the benefits. And my view was ordinarily representing the private side of that equation.
Governments can have competent workforces without the extra compensation provided by DB plans. There is no reason that retirement benefits in the public sector should be much higher than the private sector.
Maybe you and I will just have to disagree. I contend there is no "extra compensation" provided by a DB plan. (The liability is the liability--based on benefits). I do agree that there is no reason that the public sector benefits should be more generous than the private sector. In California, many of the employee pension plans are competitive with the private sector--or less. (As mentioned earlier, the Public Safety workers do not fit that category.) But you seem to jump from that assertion to "DBs are BAD" and "DBs provide higher compensation than DCs." The logic does not flow there.
There is no reason to subsidize early retirement for public employees. If public employers have trouble hiring and retaining employees, compensation should be increased in those areas just like the private sector.
This appears to move into another subject. I suggest we leave the pros and cons of early retirement programs and hiring incentives for another debate. (or did this comment have something to do with pensions?)
I have had many dealings with the Colorado PERA agency in performing my study. In my opinion, this agency and the entire public employee pension industry is a staunch defender of the indefensible. Every one of these plans would collapse if it were in the private sector without taxpayer bailouts. Politicians are deeply aligned with public employee unions who want compensation not available in the private sector. Politicians are ignorant about pensions, especially about deferred compensation in these DB plans.
This statement is hyperbolic, to me. "Indefensible"? "Collapse"? Maybe Colorado deserves those labels, I don't know. You keep talking about Colorado's PERA which admittedly I know nothing about. But, IMO, to extend your conclusions related to PERA to "the entire public employee pension industry" IS indefensible. In the case of California, you are dealing with a different animal. Take a look at CalSTRS and CalPERS. Their actuarial assumptions are not as optimistic as those you cite and the funding is not excessively low (both CALSTRS and CALPERS were in the 90% range, last I looked. That is after Calpers enjoyed 140% funding during the dot-com boom). These funds are not on the verge of collapse, despite the folks that want to run around yelling "Fire."
Okay... I'm done... could write more, but I think you get the idea.
Conventional wisdom indicates that DC/DB plan costs and retirement compensation are identical. DB plans such as Colorado PERA and California's plans costs and compensation are heavily in favor of DB plans for career employees. In a DC plan, the employer makes a contribution without any additional risk considerations. In a DB plan, the employer (taxpayer) must pay more if plan assumptions are not met. Increasingly, DB plan assumptions are not met by the tsunami of unfunded liability in public DB plans including California and Colorado. California has poured large amounts of additional dollars in the last 5 years. Without the taxpayer bailout, the Colorado and California plans would need to significantly reduce benefits.
Again, too many unsupported statements here. What does the availability, or non-availability of an indexed security have to do with anything? And an actuarial assumption as to rate of return is anything but "guaranteed." It is an assumption. And any variation from that assumption is included in annual adjustments to contribution amounts. As to ROR, from my experience, anything above 8.25% is an overly optimistic assumption but on occasion there are reasons to justify it. You say that if the target assumptions are not met, that the taxpayer is at risk. That is a distorted way of looking at it, IMO. The liability is the liability is the liability--based solely on the benefits. The percentage return does not change the pension obligation (the liability), it only effects the amount to be contributed, and when, to fulfill that future obligation.
The proper way to compare plan costs is to fund both plans in the private sector without any taxpayer bailouts. It is easy to compute the DC plan costs because contributions are fixed. To calculate the DB plan costs, the government would need to purchase a wage indexed security for each employee. This security would be payable upon retirement to provide the plan benefits. Since no such security exists, calculating DB plan costs is just a moving target.
Your usage of 8.25% is not correct. The private sector would never provide a guaranteed 8.25%. If you purchase a single premium lifetime annuity to fund retirement benefits, the private sector will only pay 5 to 6%. Remove the taxpayer bailoout and the cost of the DB plans will rise dramatically.
I can't understand what you are saying because I don't know what type of "risk/return tradeoffs" have been offered to Colorado employees. Can you put that in generic terms? I also have no idea what you mean by "undeclared deferred compensation."
Colorado PERA members have no risk/return tradeoff. PERA pays a guaranteed return in the area of 8.5% although this return can be much higher for higher paid employees. If you compare a DB plan to a DC plan, risk is a fundamental difference. The DB plan employee obtains the return with no risk. The DC plan employee seeks higher returns only with substantial risk especially near retirement age.
In my study, I have provided a number of measures of deferred compensation. For the details, you need to read the paper. Briefly, deferred compensation is a function of the difference between an account balance and the market value of the promised retirement benefits. For account balance, I use both the guaranteed interests provided by the pension agency as well as the pension agencies portfolio returns. The guaranteed interest rates are the proper baseline because DB plan retirees have no risk. I calculate the present value of a retirement benefit stream using a mortality table and interest rates provided in single premium insurance annuity (SPIA) products. Using this framework, I calculated various measures of deferred compensation including lump sum deferred compensation (difference between PV of retirement benefits and account balance). The average lump sum deferred compensation in my study was $520,000 for university retirees in the period 2001 to 2006.
I don't understand your logic here. Under scenario A (DB), the company is at risk and subject to market fluctuations. Under scenario B (DC), the employee is at risk and subject to market fluctuations. Why do you think there should be an adjustment for risk? Are you arguing that the DC plan, to be comparable to the compensation offered under a DB plan, should be adjusted up or down to compensate for risk? Why?
It is standard practice in finance to compare risk adjusted returns. Risk adjusted return is calculated by dividing the return by a risk measure. Standard deviation of returns is often used as a risk measure. Even if a DB and DC plan both provide the same retirement income, the DB plan is vastly superior because the DB plan provided the retirement income risk free. Public employee unions clearly understand this concept. Public employee unions express strong preference for DB plans preciously over the risk element. The risk free element is highly valuable to DB plan employees. In my study, the risk-adjusted return of PERA DB benefits was on the average 5.9 times higher than the risk-adjusted return of a stock portfolio.
Again--In a DB plan, the employer is subject to the liability, whether funded or unfunded. The employer is also subject to market fluctuations and actuarial market expectations that are not met (but they benefit from expectations that are exceeded.) Those risks (and opportunities) shift to the employee under a DC environment. Do liabilities ultimately fall on the taxpayer? Yes, with regard to a public retirement fund (just like they would fall on stockholders of a private enterprise). Similarly, if the state messes up a public infrastructure program and gets sued, the taxpayer is on the hook for the liability. That is why we most hold our public servants accountable and if they act irresponsibly they should be booted out and prosecuted, if appropriate. As a side note, I will mention that CalSTRS recently did institute a plan to increase employee contributions to their DB pension fund (I think it begins in 2009).
The taxpayer should not be required to bear risk for retirements of public employees. Public employees should have comparable retirement plans as private sector employees. Although there is mismanagement in pension funds, the issue is not mismanagement. The issue is compensation. Retirement compensation for public employees is much higher than private sector employees despite misleading statements in compensation surveys. The risk in these DB plans cannot be managed as evidenced by the looming crisis in DB plans throughout the country.
Maybe you and I will just have to disagree. I contend there is no "extra compensation" provided by a DB plan. (The liability is the liability--based on benefits). I do agree that there is no reason that the public sector benefits should be more generous than the private sector. In California, many of the employee pension plans are competitive with the private sector--or less. (As mentioned earlier, the Public Safety workers do not fit that category.) But you seem to jump from that assertion to "DBs are BAD" and "DBs provide higher compensation than DCs." The logic does not flow there.
I provide convincing evidence about the extra compensation in my study. I encourage you to read my paper if you have an interest and open mind. DB plans provide large amounts of deferred compensation. The deferred compensation is not recognized in compensation surveys that are used to determine public employee compensation levels. My paper has received favorable reviews in a leading pension journal. My ideas have undergone a degree of scrutiny by my peers.
I want full disclosure of compensation. If public employees are to be provided with much higher levels of retirement compensation, the compensation should be disclosed in an understandable manner. Compensation surveys do not recognize the true value of DB plan benefits.
This appears to move into another subject. I suggest we leave the pros and cons of early retirement programs and hiring incentives for another debate. (or did this comment have something to do with pensions?)
DB plans such as Colorado PERA deliberately subsidize early retirement. It is crazy to subsidize early retirement. I am fully in favor of personal choice in retirment age. I am firmly opposed to taxpayer subsidies for early retirement.
This statement is hyperbolic, to me. "Indefensible"? "Collapse"? Maybe Colorado deserves those labels, I don't know. You keep talking about Colorado's PERA which admittedly I know nothing about. But, IMO, to extend your conclusions related to PERA to "the entire public employee pension industry" IS indefensible. In the case of California, you are dealing with a different animal. Take a look at CalSTRS and CalPERS. Their actuarial assumptions are not as optimistic as those you cite and the funding is not excessively low (both CALSTRS and CALPERS were in the 90% range, last I looked. That is after Calpers enjoyed 140% funding during the dot-com boom). These funds are not on the verge of collapse, despite the folks that want to run around yelling "Fire."
The plans would collapse without huge taxpayer bailouts. You have not paid careful attention to the California situation. The California plans have huge amounts of unfunded liabilities. If the California plans were subject to ERISA regulations and no taxpayer bailouts were available, the plans would collapse in the next year. There has already been a large bailout of the California plans. Much more pain is in the future.
Conventional wisdom indicates that DC/DB plan costs and retirement compensation are identical. DB plans such as Colorado PERA and California's plans costs and compensation are heavily in favor of DB plans for career employees. In a DC plan, the employer makes a contribution without any additional risk considerations. In a DB plan, the employer (taxpayer) must pay more if plan assumptions are not met. Increasingly, DB plan assumptions are not met by the tsunami of unfunded liability in public DB plans including California and Colorado. California has poured large amounts of additional dollars in the last 5 years. Without the taxpayer bailout, the Colorado and California plans would need to significantly reduce benefits.
I'm sorry. But despite your having performed a study of Colorado pensions, I am finding that your responses are not only inaccurate when it comes to California but show little knowledge of how pension plans are actually managed and funded. First, since California does not have widespread defined contribution plans, there is no way to conclude that California's plans are "in favor of DB plans for career employees." Second, you continue to imply that any investment loss results is an increased cost to taxpayers without acknowledging that over the long term those risks are offset by rewards/opportunities, and in many periods far exceed the risk. It's called investing 101. Losses and gains will happen. The actuarial long-term rate of return takes this into consideration. Third, you continue to use hyperbolic terms like "tsunami" referring to "unfunded liabilities," something that is NOT a problem with respect to either CalSTRS or CalPERS. Fourth, California has NOT "poured large amounts of additional dollars in the last five years." They resumed funding the normal costs after coming off of a self-funding environment during the dot-com boom. Their investment gains had been so great that they were able to suspend contributions for normal pension costs, a favorable position that many employers enjoyed in the 1990s. As mentioned in my last post, CalPERS was actually funded at 138% just a few years ago. Bottom line: there has been no "bailout" of California pensions. Lastly, you say that without a bailout, the plans would need to reduce benefits, a scenario that would be prohibited by ERISA relative to vested benefits. They can change benefits on a go-forward basis, but unfunded liabilities cannot be erased or reduced by changing the accrued benefit that was promised.
I must say I am disappointed in how this discussion has turned out. You seem genuinely interested in the subject, but are unwilling to research the California pensions or to do the real analysis and let the results form the basis of your conclusions. You have taken conclusions or perceptions you reached in viewing Colorado statistics and are trying to force that conclusion onto California, despite all the facts available that refute it.
The proper way to compare plan costs is to fund both plans in the private sector without any taxpayer bailouts. It is easy to compute the DC plan costs because contributions are fixed. To calculate the DB plan costs, the government would need to purchase a wage indexed security for each employee. This security would be payable upon retirement to provide the plan benefits. Since no such security exists, calculating DB plan costs is just a moving target.
One hardly needs to have a security available, or to purchase it, to calculate the cost of an item. There are many ways of comparing the costs other than the one you mention. Regardless, let me ask you a question (and yes, I already know the answer since as I said I've had a lot of experience in this area). How do you think an employer determines the benefit amount to be offered in a DC plan when it decides to transition from a DB plan to a DC plan?
Your usage of 8.25% is not correct. The private sector would never provide a guaranteed 8.25%. If you purchase a single premium lifetime annuity to fund retirement benefits, the private sector will only pay 5 to 6%. Remove the taxpayer bailoout and the cost of the DB plans will rise dramatically.
Pardon me? No, it is not incorrect. I'm talking about an actuarially assumed long-term rate of return used for calculating annual employer contributions to the pension fund. YOU seem to be talking about some sort of "guaranteed" alternative investment vehicle that is not how large pension funds are managed. In recent years, California pension funds have been able to far exceed the actuarial rate of returns but, on a long term basis, responsible funds usually plan between the 7-8% range. CalSTRS was recently assuming 7.75%. Below are the actual returns California experienced in the large funds for the 2006-07 reporting period:
Okay... I'm calling it a night on this subject.California Public Employees' Retirement System and California State Teachers' Retirement System Performance CalPERS CalSTRS 1-year 19.1% 21.0% 3-year 14.6 15.1 5-year 12.8 13.1 10-year 9.1 9.0 Asset allocation CalPERS CalSTRS U.S. stocks 39.2% 41% Foreign stocks 22.3 21 Fixed income 23.7 21 Real estate 8.2 10 Priv equity/alt investments 6.2 7 Cash 0.6 1 Total assets $248 bn $170 bn
The plans would collapse without huge taxpayer bailouts. You have not paid careful attention to the California situation. The California plans have huge amounts of unfunded liabilities. If the California plans were subject to ERISA regulations and no taxpayer bailouts were available, the plans would collapse in the next year. There has already been a large bailout of the California plans. Much more pain is in the future.
I HAVE been paying attention and I have concluded that you must be making this up as you go. The funds are close to 100% funding. California pensions ARE subject to ERISA. And there have been NO huge bailouts.
If you want to continue to try to make these crazy statements, you better come up with some citations and links to support them. Trust me, I'm prepared to knock every single one down.
This page indicates the bailout. Since 2003, state contribution rates have increased substantially. The current economic climate will lead to future contribution rate increases (bailouts). In addition, the California Foundation for Fiscal Responsibility web page has a list of articles about pension funding problems in California.
http://www.lao.ca.gov/analysis_2006/general_govt/gen_25_anl06.html
I will concede this point. I am against any policy that politicizes pensions. The trouble with DB plans is that the contribution rate is easily manipulated. In good times, the rate is lowered and in bad times it is increased. The taxpayer cannot assume responsibility for retirement lifestyles. DC plans provide a fixed rate without the potential for politization of the contribution rates.
Here is a page indicating that public employee pension funds are not governed by ERISA. Unless the law has changed since 2003, public employee pension funds are not covered by ERISA.
http://www.nasra.org/resources/sandpfaq.pdf
You made some comments about transition from a DB to DC plan. I concede that valuation is necessary in a transition. Transition is a special case, a one-time event. Comparison of the plan costs should not be made using transition costs. My comments about plan costs and benefits involve a steady situation without transition costs.
Here is my bottom line:
DB plans like Colorado and California represent large amounts of undeclared (not disclosed in compensation surveys), deferred compensation. There is a sizable literature to support this assertion. DB plans are costly and unpredictable. DB plans are not necessary to attract a competent government workforce. DB plans are subject to political manipulation. If a DB plan is to be offered, it should be based on the federal FERS plan with much lower benefits than state plans like Colorado and California. DB plans should be financed by the private sector with fixed asset investments, similar to the financing of single premium insurance annuities. Public employees should be given the choice between a DC plan and a low benefit rate DB plan.
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