Public Pension Propaganda (1) – What they got right

Yesterday the National Public Pension Coalition* held a press conference looking to influence anyone within earshot that public pensions should not be cut and are, in fact, affordable.  In this series I will debunk some of their propaganda but, to start off, there is one area where this cabal got it absolutely right:


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Yes 401(k) plans are a scam perpetrated by employers to avoid obligations and the investment industry looking to siphon off fees. They are certainly inadequate as retirement vehicles.

That being said, what Mr. DiNapoli and the NPCC have overlooked is that their proof of the inadequacy of 401(k) plans comes from the harsh experience of the people they ‘serve’ (and who they expect to fund their own pensions) in having been snookered into them over a generation.
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* The NPCC is comprised of the Service Employees International Union, the American Federation of Labor and Congress of Industrial Organizations (AFL-CIO), the American Federation of State, County & Municipal Employees (AFSCME), the American Federation of Teachers,  the International Association of Fire Fighters (IAFF), the National Education Association and the National Conference on Public Employee Retirement Systems (NCPERS). The Coalition engages in state-based activities in support of public employee
defined benefit pension systems.

7 responses to this post.

  1. Posted by Tough Love on January 21, 2012 at 4:40 pm

    John, While there are benefits of DB Plans over 401K Plans (e.g., the pooling of mortality risks, risk sharing, and professional investment management) what is blatantly ignored in the video discussion is that both DB Plans and 401K plans can be rich or poor. There is nothing that stops a DB Plan from being no more costly than a 401K Plan. However, if such a DB Plan were put forth, these same elements would certainly not support it because the benefits would be too meager (likely by a factor of 4). That’s the real issue, they want to keep the grossly excessive (and therefore costly) Plans they have now. And when these much richer Public Sector pensions are combined with cash pay no less than their Private sector counterparts, we are clearly overcompensating Public Sector employees.

    The pension “design” (DB or DC) is less important than the VERY necessary goal of taxpayer-funding no greater than what Private sector employees get from their employers.

    Reply

    • Though you could have a DC plan that gives you more than a DB, the real difference is that the costs of DB plans can be masked and over the last 30 years the actuarial community has found new and creative ways to understatel DB costs that are now leading to bankruptcies.

      That’s why public employees should be demanding DC plans.

      Surely, they must understand the ethical fiber of the people they are dealing with who are now in the process of reneging on promises of COLAs in several states and slashing benefits (Prichard; Central Falls) elsewhere. It was OK to lie about the real costs of those benefits when they were accruing but now that public employees see that these benefits can be yanked they have to realize that the actuarial deceptions inherent in the DB system have backfired on them.

      Reply

      • Posted by Tough Love on January 21, 2012 at 5:41 pm

        The are many other reasons to shift to DC Plans:
        (1) Zero deferred costs
        (2) no opportunity for spiking
        (3) “retroactive” benefit increases are not possible
        (4) Less impact of end of career raises and/or promotions
        (5) TRANSPARENCY

        Reply

      • Posted by Tough Love on January 23, 2012 at 1:53 am

        John, I can’t help but respond to your statement that …”That’s why public employees should be demanding DC plans.”

        I believe this will NEVER happen. Why ? Because the taxpayer-funded share of their current DB Plans (to fully fund as a level % of pay over their careers) is about 25-40% of pay (with Police on the higher end). They get these rich plans ( 5-10+ times the “match” Private sector workers get in their 401k Plans) ONLY because the huge cost is easily “hidden in a DB Plan.

        Taxpayers would NEVER agree to fund DC plans much beyond their own match, So their DB “promise ” (with the full force of law) of $4 is better than a 401K guarantee of $1. Sure, they know there is a possibility of a DB haircut, but it will still be way more than the taxpayers would agree to in a 401k Plan.

        Reply

  2. Posted by skip3house on January 21, 2012 at 5:39 pm

    DC? or just tired of typing 401K

    Reply

    • Posted by skip3house on January 21, 2012 at 6:08 pm

      The portability of defined contribution pensions is legally no different from the portability of defined benefit plans. However, because of the cost of administration and ease of determining the plan sponsor’s liability for defined contribution plans (you don’t need to pay an actuary to calculate the lump sum equivalent that you do for defined benefit plans) in practice, defined contribution plans have become generally portable.

      In a defined contribution plan, investment risk and investment rewards are assumed by each individual/employee/retiree and not by the sponsor/employer. In addition, participants do not necessarily purchase annuities with their savings upon retirement, and bear the risk of outliving their assets

      Reply

  3. Posted by brian on January 22, 2012 at 2:23 pm

    I agree that 401k plans are inadequate, at least most are. The contribution limit should be MUCH higher, and all should offer an option like the Fidelity Brokeraglink plan where you can choose your own stocks rather than get stuck with a crappy selection of mutual funds.

    In the end, though, defined benefit plans are far worse – they are an unaffordable anachronism – the burden should rest on the employee not the employer.

    Reply

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