Monday, January 14, 2013

Texas Pensions Respond to Cities’ Circumstances, Face Lawsuits

We admit that the actions of the Laura and John Arnold Foundation sometimes leave us scratching our heads as to what they are trying to achieve.

Take the foundation’s recent release of its “LJAF Policy Perspective: Pension Litigation Summary.”

The report rightfully notes how pensions large and small across the nation frequently initiate reforms to their system, to enable their plan to match contributions and investment returns with expectations for future benefits. The objective, of course, is usually to minimize the contributions needed from taxpayers. A noble pursuit we believe.

The reforms aren’t liked by every one – especially those whose benefits may be impacted in the future. They then typically challenge the reforms in court. The LJAF report says, “Within the past three years, at least 24 jurisdictions have faced lawsuits alleging that pension reform measures are unconstitutional.”
Our response? So what.

Isn’t it still a prerogative of free men and women to understand whether their rights to what they see as their money is in fact theirs? We hope so. As to how the courts decide these cases is still in the process, but what we do know is that there are always efforts to “reform” pensions to the facts at hand. The LJAF says its report fills the information gap, compiling the active cases in one place so that everyone might keep a close eye on them.

At this point it’s important to note how “reform” is a relative word. The LJAF and others view “reform” as leading to the wholesale destruction of defined benefit plans.

By contrast, those who support their existing usefulness and practicality as a tool of city budget management would use the word “reform” as measures that continually adjust plans according to the real world financial situations that cities and their pensions face.

There is no one-size fits all policy panacea that would ‘fix’ all the problems said to exist, especially not a wholesale switch from defined benefit to defined contribution plans, of the sort that the LJAF has previously endorsed. That’s macro-reform, and could be said to be similar to throwing the baby out with the bathwater. The micro-reforms, occurring as they are in sloppy, choppy fashion, respond to particular problems.

Just to save you some time, there are two Texas cases in the LJAF report, both in Fort Worth. The city initiated reforms in response to the expected shortfalls their employees pension expected due to years of the city’s deferring the contributions it owed. The lawsuits were enacted in late 2012.

Again, when considering the larger issue of the health of local defined benefit pensions in Texas, we say “So what?” These aren’t reasons to get alarmed about anything, other than their clear spotlight on the tendency of delayed contributions causing problems down the line and likely to spur lawsuits. In our view, that’s the real lesson we see here.

As an aside, it must be nice to be on the dole of a billionaire’s payroll, to come up with these sorts of alarmist, but less than meaningful reports. – Max Patterson

Tuesday, January 8, 2013

Not Enough Private Sector Workers are Availing Themselves of Non-Government Retirement Plans

One of the complaints we hear about defined benefit plans is about how much money public sector employees are able to retire after 20-30+ years of service.

Of course, it is theirs, the money they have contributed from their salary to their pension account. As to why people begrudge people the use of their own money is beyond us.

But what most people don’t consider is that in most cases, public sector employees don’t have a choice of whether to contribute to their retirement. The money is automatically deducted from each paycheck.

Over 20 years, that money can accumulate and grow at very good rates of return, especially if administrative/investment costs are kept low over that time period. And remember that most public sector employees start their careers at fairly low salaries and raises are usually non-existent or rare in coming, unless the employee progresses through the ranks. Requiring these workers to contribute can be painful to them when considering their monthly take home pay. They do it nonetheless.

We mention all this because a new report from the Bureau of Labor Statistics makes note of a couple of dynamics that occur in the private sector with regard to retirement benefits. These dynamics can provide some insights into why public sector employees have been successful in accumulating, over time, considerable sums for their retirement. And it can also explain why many in the private sector are woefully under-prepared for their retirement.

The September 2012 report “Beyond the Numbers: Who has benefits in private industry in 2012?” says:
Nearly two-thirds of private industry workers had access to some form of retirement plan, typically either a defined-benefit plan (such as a pension) or defined-contribution plan (such as a 401(k)), and 48 percent chose to participate in a retirement benefit plan. (See table 1.) Access to retirement plans varied significantly by major occupational group, full- or part-time status, bargaining status, and wage category. Management, professional, and related occupations had nearly twice the access rate and more than 3 times the participation rate of service occupations. (Some examples of service occupations are healthcare support, protective service, food preparation, maintenance, and personal care workers.) Similarly, full-time workers had nearly twice the access rate and 3 times the participation rate of part-time workers. Union workers showed very high access (92 percent) and participation (85 percent) rates for retirement plans.
The “problem” that manifests here is that low paid service workers, who are also likely to part-time workers, aren’t contributing to their future. It’s difficult for them to do – and they don’t. This dynamic is proven by the next statement in the BLS report:
High-wage workers (those in the top 25 percent of all wage earners, with earnings at or above $24.81 per hour) had significantly higher rates of access and participation in retirement plans than those of low-wage workers (those in the lowest 25 percent of all wage earners, with earnings at or below $10.69 per hour). High-wage workers had access rates of 85 percent and participation rates of 75 percent. In other words, 89 percent of the high-wage workers who were eligible for retirement benefits participated in the plan (known as the take-up rate), a significantly higher share than the take-up rate of 45 percent for low-wage workers. Low-wage workers seem to be at a disadvantage because they may have more difficulty providing employee contributions, which are often required to participate in a retirement plan such as a 401(k).
Of course, the great advantage that public sector employees have is that many don’t have to contribute any portion of their salary to Social Security, whereas private sector employees pay 6.2% of their pay to SS, and their employer matches that amount for them. Many police and fire department employees, and some municipal employees, don’t pay into Social Security (and can’t expect any benefits from SS in retirement). So private sector employees, especially the lower paid, would have their take home pay reduced even further by contributions to non-Social Security retirement accounts. That’s awfully hard for them to do given the cost of living these days and their need to bring as much money home as possible

Can these disparities be addressed? Yes, they can, without impoverishing public sector employees in the same manner that current policies seemingly accomplish for lower paid, part-time private sector employees.