I know a lot of public employees in New Jersey who have retired or are seriously thinking of retiring. More than 20,000 police officers, firefighters, teachers and other public employees put in their retirement papers last year, a 60 percent jump from 2009, as momentum was building for sweeping health and pension reform in Trenton. The worst is yet to come.
According to the July 1, 2010 actuarial reports for the three largest plans I estimate there being 65,000 out of 485,000 active participants with over 25 years of service who would be foolish not to retire and take out $3 billion annually.
Normally this would be cause for celebration. 65,000 older participants accruing higher benefits would exit the system to be replaced by younger, lower-paid employees with a fraction of the accruals. But these aren’t normal times. With about $8 billion being paid out annually already and $71.6 billion left in the plan (a substantial portion of that being the employees’ own contributions) New Jersey has been operating their pension plan on the assumption that these people would never retire since hardly any money was put aside for that eventuality.
The proposal on the table to have everyone other than current retirees pay up to 30% of their health care costs and to have workers pay a uniform 8.5% of their salaries to fund some pensions (not necessarily their own) is what’s scaring everyone into retirement.
I have an alternative plan that I’ll set out in my next blog on this issue but I’d like to hear from you first. Now that you have an idea of the numbers what would your solution(s) be?
Posted by skip3house on February 28, 2011 at 6:46 pm
Likely yours from a year back. Close the pension funds down, with every one getting what they put in. Any balance fairly split somehow, with compression, and any bits left for the really poorest.
Posted by Larry Littlefield on February 28, 2011 at 8:14 pm
My solution would be the same as in New York.
First figure out what the pensions that were promised to NJ workers 15+ years ago, without all the retroactive enhancements and with no pension spiking or games, should have cost as a percent of payroll based on a reasonable rate of return assumption. I’m not a trained actuary, but with almost everyone who is spouting nonsense, I took a shot at it in this post for NYC some time back.
http://www.r8ny.com/blog/larry_littlefield/so_what_do_those_public_employee_pensions_cost_anyway.html
Here is my take on the rate of return.
http://www.r8ny.com/blog/larry_littlefield/point_of_intersection_between_the_years_in_retirement_rich_and_the_bonus_rich.html
If taxpayers paid less than the real cost of what they promised, they’d have to pay it back with interest over the next 15 years. At a real rate, not the 8.0% or more fantasy rate.
The employees pay all the rest, no matter how much it was. You want irrevocable, retroactive pension deals and scams in exchange for political support that the general public doesn’t have a say in and isn’t told the consequences of? Fine. You pay.
But for a 15 year period, in order to get something out of the already retired who benefitted from the deals, the current workers would be allowed to count half of an increased percentage contribution to the cost of their health insurance by the retirees as part of their contribution. The taxpayers would use the other half of the increased retiree contributions to help pay down their pension debts.
What if the employee contribution equaled 20% or more of pay? Well, that’s how much private sector workers should be kicking in to their 401Ks during the prime of their careers to be able to have a mere ten years in retirement, as I noted here.
http://www.r8ny.com/blog/larry_littlefield/what_would_a_pension_cost_for_you.html
My guess is that the taxpayer portion of the hole would be higher in New Jersey than in New York City, and the worker portion slightly less. Fortunately, taxes are lower as a percentage of the income of state residents in NJ than in New York, as I showed using Census Bureau data here.
http://www.r8ny.com/blog/larry_littlefield/taxes_data_from_the_census_of_governments.html
I guess the other alternative to 15 years of pain is some form of bankruptcy.
The question is, how much pain would a court impose before allowing a state or municipality to get out of some of its debt or pension obligations? In the 1970s, just to get loans it would later have to pay back, NYC was required to lay off 40% of its police, cut so many teachers that class sizes rose to 50, stop maintaining its infrastructure, and raise taxes so high one million people and 1/2 million jobs left town.
The one thing I would not do is offset all the retroactive benefits Generation Greed promised itself by lower pay and benefits for future public employees, which is what everyone seems to want. In addition to the equity and generational equity aspects, those are the workers who will have to be hired to produce public services in the future. In NYC the ongoing cycle of sweet deals for those cashing in and moving out and pay and benefit cuts for new hires has left the city with an unqualified, sometimes underpaid (in cash) and unmotivated but still massively expensive workforce.
New public employees should get the same taxpayer pension contribution as a percent of their pay that would have been enough to give the current workers what they were promised. If they are to receive less in pensions, then their own contribution would be less as well, and their take home pay higher. And their retirement benefits should be separated from the vampires who went before, if not in personal 401K accounts then in new pension systems.
Bottom line, if they want to save their pensions, the employees and retirees are going to have to share in the sacrifice. But taxpayers are going to end up paying off a share of the Generation Greed era too.
Posted by skip3house on February 28, 2011 at 9:05 pm
Needs no mention likely – ad a pay stub deduction for a 401(K) type plan, pay as you go basis, self responsibility, audited, safeof employee choosing……Any matching funding by that current NJ Leg. Lawmakers should not be obligating future ….
Posted by javagold on March 1, 2011 at 12:24 am
wow watch the piggies make their run on the pension ponzi …..do they really think they can hide from reality in retirement ?
so let me get this straight….the piggies think by retiring that those on the low end of the pyramid are going to have enough to put into the pension ponzi to fund their golden parachute retirements…..
1. new pension rules for new hires
2. not nearly enough new hires coming in, with freezes
3. new hires making much less salary, thus much less added into pension ponzi
the SQUEALING is going to be at a deafening high pitch by 2012 !….but not only are they pigs, they are ostriches as well !
Posted by Julie Z. on March 1, 2011 at 2:08 pm
Hi John,
I’m the contributors editor at Business Insider – I’d love to talk to you about running some of your posts on our new politics section, but I can’t find your contact information anywhere. Please shoot me an email if you’re interested.
Thanks in advance,
Julie
Posted by johnbury on March 1, 2011 at 2:17 pm
Julie,
Definitely interested. I see a John Ellis piece today linking to me. I very much would like to bring this issue to the fore. Just give me the ground rules and I can start any time. Contact info: Bury and Associates, Inc. 26 Park Street Montclair, NJ 07042 Phone: (973)-783-4477 ext. 201 Cell: (908)-868-1701 Fax: (973)-783-4477
John
Posted by javagold on March 1, 2011 at 5:33 pm
just dont put BITCH in the headlines
Posted by burypensions on March 1, 2011 at 5:37 pm
That’s not a ground rule yet.
Posted by brooklyn91941 on March 1, 2011 at 5:23 pm
I believe that a defined benefit type plan is essential for all workers to insure some stable source of retirement income. That said it has to be reasonable. If we use 1% per cent of compensation per annum from year one of employment, that would provide a reasonsable benefit. No padding for overtime at the end, just normal compensation. If a worker earned an average $50k, the benefit would be $500 per year, after 25 years the annual benefit would be $12,500. That type of benefit could be funded by the state easily. It could be somewhat higher, but that a good starting point.
This could be supplemented by a 401k type program. Since most people can’t manage their own money effectively, the state would provide education on investing and make advisers available. Any Fund company that provides options would be happy to provide advisers. 401k by themselves have been a disaster.
Options should be chosen based on the skill of the manager and consultants should be hired to evaluate choices.
If we go to some version of the above, employees would have a good benefit and it wouldn’t bankrupt the state. The state would have to contribute annually what is required. No accounting gimmicks ever.
Posted by burypensions on March 1, 2011 at 5:43 pm
What should have been done and what can be done for new hires is a purely academic discussion – ivory tower stuff.
Defined Benefit pensions appealed to politicians since, with the help of the actuarial profession, they were free to promise without paying. Now the problem is who pays?
Knowing a little about NJ politicians I have a practical solution that I see being implemented, though it won’t be admitted to. I’ll try to put it forth tomorrow.
Posted by brooklyn91941 on March 2, 2011 at 12:08 am
I’ll look forward to it.
Posted by Tom B on March 1, 2011 at 8:46 pm
Granted, the pension system is horribly underfunded, broke and isn’t capable of supporting future obligations. It might be inevitable that the money will run out and no one will get the payments they are currently getting, let alone being able to pay future retirees. I have no solutions to solve the problem that doesn’t involve raising revenue to pay the lack of funding that was supposed to have gone into the fund. That might mean more taxes, which I don’t approve of considering that here in NJ we have the dubious honor already of being the highest taxed people in the country. Another solution to raise revenue would be to create a State Bank using the North Dakota model and bypass the NY Banksters. ND, by the way, runs a bduget surplus.
What I find disturbing in this discussion is the building resentment that is being created, pitting those in the public system against those who have lost their benefits, either because they’ve lost their jobs, or their employers are cutting their benefits stating rising costs as their excuse. Economic class warfare is what is being created here. I read this in a recent article by Mark LeVine, a professor of history at UC Irvine, and it rings so true:
“… those without healthcare, job security or pensions seem intent on dragging down the lucky few unionised workers who still have them rather than engage in the hard work of demanding the same rights for themselves.”
We can blame those greedy people in the public sector for the problem, and decry their apparent lack of paying up their fair share of those pension benefits. They pay 5% into it now, in case you weren’t aware. (It wasn’t always that high, to be fair). About what your average employee in the private sector might put into this 401(k) plan. The problem is that the pension system has faced raids by Gov Whitman, poor decisions concerning the reduction of the retirement age during the McGreevy admin(from age 60 to age 55), poor investment management decisions by the fund manager appointed under the Corzine admin (another story in itself), and some serious underfunding issues by all of the past administrations. It is wholly unfair and wrong to place all of the blame on the people in public service. Our esteemed elected officials have quite a bit of the burden to share on this one, and we as citizens have to share a portion of this too for voting them into office, not just once, but repeatedly. Shame on us all.
Posted by Michael F. on March 1, 2011 at 11:36 pm
Tom B.
Many thanks for setting the record straight.. We the working poor
(no longer the middle class) always end up eating dirt as the politicians and Union bosses eat Fillet Mignon in Atlantic City.
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