Thursday, May 17, 2012

Analysts at American Enterprise Institute, Heritage Foundation Still Selling Skewed Statistics

We’ve written previously about Andrew Biggs, an analyst at the American Enterprise Institute, and Jason Richwine, an analyst at the Heritage Foundation, who cover public employee pension issues. Their position is basically this: if taxpayers can’t have defined benefit plans from their private sector employers, then public employees shouldn’t either, damn the consequences of having employees in both sectors retiring without adequate nest eggs.

Our previous blog focused on how they used the historic market tumult in 2008-09 to negatively position pension systems’ funded status. Their “sky is falling” approach to public policy issues is unbecoming and counter-productive to good-faith debate, to say the least. But nonetheless they were back at it recently, utilizing their “pension envy” tactic in this way:
For example, a typical Illinois school teacher who worked for 30 to 34 years would retire with a guaranteed pension benefit of $60,756 a year, an income higher than 95 percent of Illinois retirees. To achieve the same level of guaranteed retirement benefits, a private sector worker with the same salary would need to save roughly 45 percent of his salary in a 401(k). The difference in pension benefits is more than enough to push public sector compensation above private levels.
For one thing, the example they use is Illinois, not Texas. Average defined benefit plans for Texas’ retired teachers, like most other public employees, is more typically in the $20-30,000 range. Illinois is Illinois. National analysts need to keep that in perspective. But they like to use the anomaly and the exception as example of the rule.

Then, in the next paragraph, they point out exactly what we have been saying, in the bold emphasis:
Our own work simply points out that a guaranteed benefit is more valuable than a risky one. Public employees with traditional pensions receive guaranteed benefits. Private sector workers with 401(k) plans, if they wish to receive benefits at around the same dollar level as public employees, have to take significant investment risk.
We agree with Biggs and Richwine on this point: private employees should not have to be their own investment managers in 401(k)s. It’s too risky and it’s not working for them. We disagree with them on the point that if 401(k)s are bad fror private sector employees then they should be forced onto public sector employees.

The correct policy debate would be one that addresses the causes of that situation, that defined benefit plans have become impractical for private sector employers to use. The wrong policy debate is the one that Biggs and Richwine want, to force public employees into bad retirement vehicles that already exist for private sector employees.

Biggs and Richwine really fly off the handle with this paragraph:
Public sector pensions generally assume 8 percent returns on investments, and they calculate pension contributions based on that assumption. However, benefits to public employees are guaranteed even if the plan's investments fall short of 8 percent. What this means is that public employees as a group effectively are guaranteed 8 percent annual returns on both their own contributions and those made by their employer -- at a time when the guaranteed return on Treasury securities available to workers with 401(k) plans is only 2 percent to 3 percent. The difference in benefits payable at retirement can be huge.
This may be news to them, but public employees are not “guaranteed” 8 percent annual returns on contributions to their pension plan.

Instead, the actuaries for a pension system might use an 8 percent return to calculate the amounts that both the employer and employees would need to contribute to achieve a certain defined benefit once they retire.

Obviously that’s considerably different from a “guaranteed” amount. It’s telling that they don’t seem to draw this distinction.

Many systems aren’t generating 8 percent returns right now due to sluggish economies and difficult investing environments. As such, in Texas at least, it is increasingly common to see plan sponsors, their actuaries, and employees going back to the drawing board and define what makes the most sense for an assumed rate of return for a certain level of benefits. That is happening nearly everyday somewhere in Texas at local and state pensions for public employees. Together, the pension system participants work to agree on some level of benefit that is achievable and attractive for every one involved.This is the way things are supposed to work.

Once again, we’d ask you to view any analysis that come from Mr. Biggs and Mr. Richwine with a high degree of skepticism as they are often wrong on facts, or they skew sitautions to create a false sense of alarm to make their arguments. Regardless, they continue to fail to address or encourage discussion around the more meaningful reforms that should be occuring in private sector employees pensions. – Max Patterson

Wednesday, May 9, 2012

Sky Continues Not To Fall on Public Employee Pensions Around the Nation

The typical newspaper headline over the last few years has been about the failure of public employee pensions in certain cities and states to match their assets with their liabilities, meaning the benefits due to retirees. The doom-and-gloom headline would likely focus on one or two city or state plans that weren’t disciplined in funding their pensions on yearly basis, only to find themselves at some point potentially owing huge amounts for future retirement obligations they had made to people who’d dedicated their life to providing a public service.

The good news today is that we may see fewer of those sorts of headlines as cities and states do what they should to balance their books. And we are likely to see even fewer.

This week the Center for State & Local Government Excellence released a new report, “The Funding of State and Local Pensions: 2011-2015,” showing that public pension plans funded ratios slipped a modest 1 percent in 2011, to 75%, reflecting actuarial smoothing caused by a reduction in the growth rate of liabilities. In other words, as cities and states have cut back on hiring, and reformulated their plans to match income with outlays, the decline in funded ratio has declined at systems around the nation.

They didn’t say this, but I will: the system is working in terms of people across the nation coming to the realization that adjustments needed to be made to reflect a slow growth economy.

The study projects continued steadiness, and then improvements in funded status, as the economy and stock markets return to more ‘normal’ growth. Here’s the conclusion from their report:

The funded status of state and local pensions has been front page news since the collapse of financial markets in 2008. At the time, it was clear that the funded ratios of public plans would continue to decline as actuaries gradually averaged in the losses. Indeed, the funded status for 2011 was 75 percent compared to 76 percent in 2010. The decline was mitigated somewhat by much slower liability growth.

The reason that the growth in liabilities has slowed is that states and localities have laid off some workers, frozen salaries, and reduced or suspended COLAs. Because many of these changes are one-shot, liability growth is likely to pick up somewhat in coming years. Even if the liability growth rate picks up, however, phasing out years of low returns in the actuarial averaging process should lead to an increase in assets under our “most likely” stock market scenario. Specifically, if the stock market increases at about its historical rate over the next four years, the funded ratio for state and local plans should increase gradually to 82 percent in 2015.

The critics of defined benefit plans like to use scare tactics in their campaigns against public employee pensions, but the general public should see this report as continuing evidence that the “crisis” is whipped up and manufactured. Leave the system to work itself out. 

The chart below shows the funded status of Texas’ biggest state pension systems, and is available on page 12 of the report. --- Max Patterson

Tuesday, May 1, 2012

NIRS Study: Pensions' Benefits Create Economic Activity

Just like there are two sides to every coin there are two sides to every pension dollar. All too often we get caught up in the details of one side of the pension equation – the contributions that the taxpayer-as-employer makes to their city’s public employees’ retirement plan – and we lose sight of the other side.

If you are asking, “What other side?” you’ve demonstrated the point.

The other side is that the pension benefits are distributed to millions of people across the United States, and they do things with that money. For most pension recipients, it’s not much, probably averaging in the $1,500-3,000 per month range, but when spread out over millions of people it adds up to a significant additive to our economy.

To prove this, the National Institute on Retirement Security conducted a major study of the after-effects of pensions, when the benefits are distributed to retirees. The NIRS study offers some very significant findings that most people wouldn’t think about or know because of their focus on one side of the coin.

As such, I strongly recommend reading the NIRS report, Pensionomics 2012: Measuring the Economic Impact of DB Pension Expenditures, which offers these findings for Texas:
  • In 2009, 478,767 residents of Texas received a total of $10.2 billion in pension benefits from state and local pension plans.
  • Their average pension benefit was $1,776 per month or a modest $21,318 per year. These benefits were for retired teachers, public safety personnel, and others who served the public during their working careers.
  • Between 1993 and 2009, 19.91% of Texas’ pension fund receipts came from employer contributions, 17.05% from employee contributions, and 63.04% from investment earnings. [emphasis added].
  • Retiree expenditures stemming from state and local pension plan benefits supported 128,204 jobs in the state. This represents 1.1 % of Texas’ labor force.
  • The total income to state residents supported by pension expenditures was $6.0 billion.
  • Retirees’ expenditures from these benefits supported a total of $20.2 billion in total economic output in and $11.2 billion in value added in the state.
  • Nationally, state and local pensions support 2.9 million jobs and $443 billion in economic activity.
We highlighted the 63.04% of pension benefits that come from investment earnings because that really speaks to the success of the hardworking pension board trustees, many of whom are TEXPERS members, who have played a part in growing those investment earnings over the years across our great state. Their contribution to that phenomenal statistic should not go unnoticed. Every dollar of investment return is a dollar that taxpayers or public employees need not provide.

It is our hope that TEXPERS played a part in that equation, having fulfilled our mission over 23 years to provide pension investment and benefits administration education to our members. – Max Patterson