State and Local Pensions: Separating Myth from Fact
2008 EARN ConferenceDecember 10, 2008 – Las Vegas, NV
Beth Almeida Executive Director
Defined Benefit Pensions vs.Defined Contribution Accounts
• Defined Benefit• Contributions pooled in
a common trust• Investments made by
professionals/trustees• At retirement, regular
monthly pension payments for life
• Defined Contribution• Contributions made to
an “individual account”• Investments are
employee-directed• At retirement, account
balance is yours – annuity options are rare
Private Sector DB to DC Transition
Trends in DB and DC Plan Participation
0%
10%
20%
30%
40%
50%
DC Participation
DB Participation
Retirement Readiness – What Difference Does a Pension Make?
• DB plans provide …
– Secure and adequate retirement income
– Those without pensions are more likely to be at risk in retirement
Growing Retirement Risks
Percent of Households Aged 51-61 At Risk of Being Unable to Sustain Pre-retirement Standard of Living
19%
32%
0%
10%
20%
30%
40%
50%
1992 2004Source: Munnell, Webb and Golub-Sass. 2007. “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No. 7-11. Center for Retirement Research, Boston College.
Growing Retirement Risks
Percent of Households "At Risk" by Birth Cohort, 2004
35%
44%49%
0%
10%
20%
30%
40%
50%
Early Boomers Late Boomers Gen XersSource: Munnell, Webb and Golub-Sass. 2007. “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No. 7-11. Center for Retirement Research, Boston College.
Public Employees Far More Likely to Have DB Pensions
Retirement Plan Coverage by Sector for Covered Workers
80%
10%
14%
64%
6%26%
0%
20%
40%
60%
80%
100%
State & Local Private Sector
Both
DC Only
DB Only
Source: Munnell and Soto. 2007. “State and Local Pensions are Different from Private Plans” SLP-1. Center for Retirement Research, Boston College.
Proposals Have Emerged in Some States to Dismantle Public Pensions
Misperceptions about Public Pensions
• Relative cost of DB plans vs DC plans
• Consequences of “freezing” DB plans
• How public pension plans are funded and how they invest
Cost of DB and DC Plan as % of Payroll
12.5% 22.9%0%
5%
10%
15%
20%
25%
DB Plan DC Plan
DB Plan Can Deliver Same Benefit at About Half the Cost of DC Plan
DB Cost
No Longevity Risk Pooling
Less Balanced Portfolio
Lower Returns/Higher Fees46% Savings
Required Assets per Employee at Age 62
$354,962
$549,903
$0
$100,000
$200,000
$300,000
$400,000
$500,000
$600,000
DB Plan DC Plan
DB Plan Can Do More with Less
Look Before You Leap: Unintended Consequences of Pension Freezes
• By itself, freezing plan does nothing to close funding shortfall
• Freezing plan undermines the economics of the plan by starving it of new entrants
• Because of accounting regs, plan costs can actually increase
Funding of Public Pensions
• “Most state and local governments are on track toward full funding of their pension plans” (GAO - Sept 2007)
• “The funded status of state and local government pensions overall is reasonably sound” (GAO - Jan 2008)
• Still, investment losses will create pressures in coming years ….
In It for the Long HaulReport Conclusions
• Public plans are prudent investors – Rebalance in response to price swings– Systematically follow practices of performance
leaders– Avoid excessive risk-taking, moral hazard and
employer conflicts
• If anything, the last crisis made public pension plans more cautious, not less cautious
Separating out Myth from Fact
• Public pension plans meet twin goals of …
– Retirement security for employees/retirees– Fiscal responsibility for taxpayers
• Restoring retirement security will require “raising the bottom,” not racing to the bottom
www.nirsonline.org
Questions?
State and Local Pensions: Separating Myths from Fact
2008 EARN ConferenceDecember 10, 2008 – Las Vegas, NV
Beth Almeida Executive Director