Wednesday, August 29, 2012

San Antonio Newspaper Article Focuses on Sizzle, Misses Steak about TEXPERS Educational Conference

We here at TEXPERS know that the media live on controversy, confrontation, and schism wherever they can find it. It’s called “making headlines” and that is how they create a product that sells to an audience, that then can be turned into advertising dollars.

We understand that dynamic and we appreciate the work that the media does in bringing issues and events to our attention. We, as free citizens, need the media telling us all what is going on around us. And we realize that, without the sizzle of a sexy headline, people wouldn’t read the newspaper and so there wouldn’t be any newspaper. The headline “20,000 planes took off and landed again safely today” would get boring day after day, which is why the media only focuses on the one that might, unfortunately, crash every year and a half or so.

Such is the case with a story that featured TEXPERS’ activities on its members’ behalf at our summer conference which concluded this week.

The story, “Groups defend public pensions,” provided a summary of my and another TEXPERS’ member comments about special interest groups – all with funding coming from outside of Texas – who have as their defining purpose the dissolution of defined benefit plans for public employees. There’s no ‘give’ in their position: No matter how well DB plans perform in Texas for police, firefighters and municipal employees and the cities they work in, they must be replaced by DC plans, they say. There’s no rational debate or discussion about the matter. Just because some systems have not fared well in other parts of the country, they must be dismantled here, our opponents say.

So, yes, we advised our members about these threats and the reporter dutifully came to the one presentation where some hint of controversy drew him to our conference. We’re not blaming him for doing that. It is his line of work.

But what you should know is that, for the previous three days, more than 500 trustees of pension systems from around the state came to San Antonio to further their education about investments and pension administration so that the burdens on taxpayers for their employees pensions would be as low as possible. They heard from money managers, lawyers, and other pensions, to learn how to operate the best possible pension, on their city’s taxpayers behalf. Dedicated men and women took time from their personal lives to devote their efforts to their colleagues at fire houses, police stations and city halls across our great state. They came to invest their and their fellow’s money as best they can so that after 20 or 30 years of service, at very minimal rates of pay, the public employee could retire securely at least possible burden to their fellow taxpayer.

In our view, this was the equivalent of the 20,000 planes that cross our skies safely each day. It won’t make headlines, but it’s the truth of what really happens with local pensions in Texas. -- Max Patterson

Tuesday, August 28, 2012

Where’s Texas?

The doom-and-gloom naysayers of public employee pensions got more ink last week in the Wall Street Journal.  The story was “Hard Times Spread for Cities: Rising health, pension costs top the list as municipalities struggle to recover from the recession,” and was written by three WSJ staffers, Kris Maher, Bobby White and Valerie Bauerlein.

Do a search for the word “Texas” and once again you’ll find our great state is nowhere mentioned in the story.

Now, we have no doubt the journalists did their job in thoroughly investigating situations they recount in California, Pennsylvania, Michigan, North Carolina, Illinois, Rhode Island, Massachusetts, Ohio, and Missouri, where cities are struggling with pension costs or looking to raise taxes to support other services.
But these trouble cases have been all the media rage over the last few years. They usually follow mismanagement by politicians over years and decades. And they seem to be more the exception the rule.

It’s been our wish over the years that every story like this would include a quote from someone that knew about the overall health of the public employee pension system in Texas. If they would, the story might include a paragraph that would say something like “‘We’re not having the same problems in Texas, where a system of checks and balances tend to keep pension contributions in balance over time,’ said Max Patterson, the executive director of an association of local pensions across Texas.”

Somehow, I don’t think we ever will, but it is the truth, and it would add some fairness and balance to every story like the one that appeared in the WSJ. – Max Patterson

Wednesday, August 15, 2012

Policy Observers Starting to Address Core Causes of Pension Envy

We have for several years now been noting the “pension envy” phenomenon, where people in the private sector want the same defined benefit plans that public sector employees have. We have said that we agree with them completely – that ERISA laws placing onerous burdens on private sector companies need some revision. We agree that new thinking is in order. We don’t agree with their position that because most private sector employees don’t have DB plans, then public sector employees can’t have them either. Public policy should be guided by what works, not some sense of class fairness determined by where you work.

This pension envy, in our view, also has its origins in the failure of 401(k) plans to adequately generate the returns most Americans need for retirement. There is some irony in this development, as we remember how, in the 1990s when stock markets were booming, we would read about the imminent death of antiquated defined benefit plans. Why would anyone in the public sector agree to meager 5 percent returns when mutual funds in the 401(k)s were making 20 percent each year? That was the argument then. 

The 401(k) disaster is beginning to be recognized. We’ve noted how the annual Deloitte study of 401(k) plans shows increasing discomfort on the part of employers for the retirement status of their employees. We’ve seen studies from the Center for Retirement Research indicating severe funding shortages for retirees.

Now we have another academic making some of the same observations, that 401(k)s aren’t getting the job done. Here’s a few paragraphs from a story, “Our Ridiculous Approach to Retirement,” appearing recently in the New York Times, by economics professor Teresa Ghilarducci:
The current model for retirement savings, which forces individuals to figure out a plan for their retirement years, whether through a “guy” or by individual decision making, will always fall short. My friends are afraid, and they are not alone. In March, according to the Employee Benefit Research Institute, only 52 percent of Americans expressed confidence that they will be comfortable in retirement. Twenty years ago, that number was close to 75 percent.

I hope that fear can make us all get real. The coming retirement income security crisis is a shared problem; it is not caused by a set of isolated individual behaviors. My plan calls for a way out that would create guaranteed retirement accounts on top of Social Security. These accounts would be required, professionally managed, come with a guaranteed rate of return and pay out annuities. This is a sensible way to get people to prepare for the future. You don’t like mandates? Get real. Just as a voluntary Social Security system would have been a disaster, a voluntary retirement account plan is a disaster.

It is now more than 30 years since the 401(k)/Individual Retirement Account model appeared on the scene. This do-it-yourself pension system has failed. It has failed because it expects individuals without investment expertise to reap the same results as professional investors and money managers. What results would you expect if you were asked to pull your own teeth or do your own electrical wiring?
Defined benefit plans work in part because employees are required to make contributions to their individual retirement account, and they sacrifice some of their current income for future, delayed gratification. They rely on the professional decision making of their Board and the money managers they hire. The same dynamic does not exist with 401(k)s and it is a serious flaw. We don’t like mandates either, but there needs to be some fundamental change in how all policy makers view individuals savings capabilities.

You might also want to see Ms. Ghilarducci interviewed on this subject on a Web interview, available here. – Max Patterson

Tuesday, August 7, 2012

Have DC Plans Delivered in States that Try Them? No One Knows

In a previous blog featuring responses to questions from Ron Snell, senior fellow at the National Conference of State Legislatures, we learned that Alaska’s switch from a defined benefit to defined contribution plan for public employees was caused by concerns that actuarial projections were wrong, and healthcare benefit costs exploded.

We weren’t satisfied with our question though because it left too much wiggle room for the true-believers of DC plans. So we asked Mr. Snell the following: “…the question [we have now] is whether the DB plan was the core problem or a poor actuary and exploding health care costs. If those were extracted from the equation, would the DB plan have needed to be closed to future participants?” Our reason for asking this is fairly simple: was the performance of the DB plan to blame? Sure, a plan can have bad assumptions. Sure, the people can overpromise benefits – in this case healthcare benefits. But when it comes down to it, is the performance of the DB plan to blame? Here’s what Mr. Snell said:

I understand your question, but I don’t know what the answer is. The situation at the time was that the funding ratio of the plan, which was well above 100 percent in FY 2000, and had been there for several years preceding FY 2000, fell to less than 66 percent in FY 2005 because of investment losses in the recession of 2000 and growing liabilities. A broadly-shared sense by the middle of the decade was that the plan was too expensive for the state. Many other states in that situation have chosen alternatives short of fundamental plan redesign, so one answer to your question would be that there might have alternatives to the one the Legislature adopted. I’m not in a position to critique the Legislature’s decision. Opinion in Alaska remains sharply divided as to the wisdom of the change, and most sessions since the change was adopted have seen proposals to reverse it.

So I don’t know.

It’s very refreshing to see someone so honest in public policy debates. Unlike many others who blindly advocate for DC plans, Mr. Snell realizes, like us, that there are many considerations about developments around public employee pensions and the options to remedy them. As we responded to Mr. Snell, it seems that the Alaska legislature threw the baby out with the bathwater in response to what was going on.

Which led us to our final question to Mr. Snell: “Is there any analysis available as to how the employees have done on their own using the DC plans?” Here was his response:

…there’s not a lot of evidence because most of the public DC plans are too new.

Indiana has a DC component in its hybrid plan (which goes back to the 1960’s) but I am told (having asked several times) that the state has never studied the question of the adequacy of returns from the DC plans.

When around 2000 Nebraska looked at the issue of the adequacy of benefits from its long-term DC plan for state employees (which also was begun in the 1960’s), the conclusion was that benefits were not comparable to those that Nebraska teachers received from their DB plan or that similarly-situated state employees received in DB plans in the surrounding states. That was attributed in large part to members’ tendency to invest very conservatively, relying on money market funds and fixed-income securities in the hope of avoiding investment losses. Nebraska therefore closed that plan to new members, and enrolls them in a cash-balance plan with a guaranteed rate of return.

Much is made of the low earnings of the now-closed West Virginia DC plan for teachers, but my own feeling is that there were so many complicating factors in the West Virginia situation, no generalizations should be based on it.

Michigan of course began a DC plan for state employees in the mid-1990s, but so far appears not to have studied the adequacy of retirement benefits.

A study that attempts to provide a general answer is a paper Roderick Crane and others of TIAA-CREF published a few years ago, “Designing Public-Sector Pensions for the 21st Century,” that discusses that issue among many others.

Crane makes the point that wealth-accumulation instruments and pension plans are different, and that defined contribution and cash-balance plans may be constructed to be one or the other, but not both. Key elements of a design intended to provide adequate salary replacement are mandatory participation (not true of all public DC plans, when they are a component of a hybrid plan), adequate contribution levels, and conversion to annuities at retirement.

Crane looks at the long-term record of DC plans in higher education, and concludes that when combined employer and employee contributions are at least 10%, and have a substantial investment in equities, from 40% to 60% over a lifetime, such plans can produce income replacement ratios of 43% to 49%. The addition of Social Security benefits would result in replacement ratios of 70% or more. He also indicates that a combined contribution rate of 15% can produce a replacement ratio of 70% before Social Security benefits are taken into consideration.

Crane notes (p. 48) that contribution levels should be substantially more than 10% to provide salary replacement for plans whose members do not participate in Social Security.

Below is a link to Crane’s paper. I have taken the salary-replacement figures above from page 50.

Again, we appreciate Mr. Snell’s candor. We will dig into the Crane study and let you know our thoughts. – Max Patterson