Lesson from a phony pension reform

In June, 2011 New Jersey politicians enacted reforms that were supposed to ‘save’ the state retirement system.  We now have a full valuation year and, based on this spreadsheet, we can come to some interesting conclusions:

  1. Even without cost-of-living-adjustments benefit payouts increased by 7% (from $7.75 to $8.3 billion), a rate that would double payouts in 10 years, even without COLAs.
  2. The number of state workers may have dropped by 14,000, as governor Christie claimed,  but salaries stayed the same ($27.2 billion) so we are paying the same for less.
  3. The increase in contributions required of government workers, a source of some protest, resulted in about $200 million in additional money annually for the system, basically a rounding error.
  4. Liabilities rise, the actuarial value of assets stays the same, and the market value of assets drops – a pattern likely to continue ad infinitum.

Ironically it was Otto von Bismarck, the originator of the public pension, who claimed politics to be the art of the possible.  The 2011 pension reforms in New Jersey were the only ones possible within our political environment which doesn’t allow anything effective to be possible.




PS: for the actuarially inclined the Annuity Factors (AFs) for the retirees in the different systems are fascinating to compare.  The PERS plans look right as the AFs go up to take into account the new younger, higher-benefit retirees yet the Teachers and Judges plans have similar AFs from year-to-year and the State Police and PFRS AFs both dropped significantly from 2011 to 2012.  COLAs were gone in both valuations and outside of the Teachers plan, which Milliman did, all the valuations were done by Buck supposedly using the same assumptions.  Go figure.

52 responses to this post.

  1. Posted by Javagold on March 11, 2013 at 12:46 am

    Fuck all the parasitic leeches. It’s time for people to say Enough !!


    • Posted by Al Moncrief on March 11, 2013 at 7:26 pm

      Java, I am not going to stand by and listen to you disparage OUR UNITED STATES MILITARY (whose public pensions, by the way, have a ZERO percent funded ratio) as “parasitic leeches.” The are public sector retirees who have earned their pension benefits. If not for our military you would likely be speaking German! Disclaimer, I speak German, (a bit.) Unsere soldaten sind ausgezeichnet! Al

      P.S. Leeches are only “semi-parasitic.”


      • Posted by Tough Love on March 11, 2013 at 7:37 pm

        Al, Quite a stretch ….

        Where did javagold say ANYTHING about “OUR UNITED STATES MILITARY”?


      • Posted by Javagold on March 12, 2013 at 11:15 am

        Nice try Al. But I am only concerned with the public employees in this corrupt cesspool of a state.


        • Posted by Al Moncrief on March 13, 2013 at 12:11 pm

          Apologies Java, I’m happy to hear that you at least support the public pension contractual rights of public employees outside of New Jersey. Al


          • Posted by muni-man on March 14, 2013 at 11:55 am

            Colorado’s Treasurer says the pension system is not sustainable – seems that’s Colorado’s real Rocky Mountain ‘HIGH’. If it’s not sustainable at 8% ROI, I wonder what adjective they’ll use to describe it when the new lower ROI values come out soon –> untenable? unsupportable? –> leading to Defunct? Moribund?
            Looks like PERACOLA might be in real PER-IL after all Al.

      • Posted by Anonymous on March 13, 2013 at 4:01 pm

        Give it up Al. I believe that Java was referring to the parasitic public UNION leeches not our military who are not unionized.


        • Posted by Tough Love on March 13, 2013 at 4:47 pm

          AL is hopeless ………

          Al just doesn’t understand that “promises” which are the result of collusion and self-dealing between the Public Sector Unions and the elected representatives that approve these grossly excessive pensions need not be kept… ESPECIALLY when those 2 self-dealing groups are trying to bind a betrayed third party (the Taxpayers) to pay for it.


        • Posted by muni-man on March 13, 2013 at 5:16 pm

          Al appears to be a retired member in good standing of the ‘DUH, what me worry’ school of employment that publics fervently adhere to, with supposedly ironclad lifetime guaranteed everything or so they thought, but which is now starting to seriously unravel and blow up in their faces. They’ve been financially trampling all over the private sector in the process of getting these ridiculous benefits for years now. They’ll be forced to make major concessions or just go without and that’s simply too damn bad. I care for the economic well-being of publics about as much as they care for mine, which is to say SQUAT.


    • John;

      Based on your willing to publish “java’s” verbiage of 3/11/13 I have come to a reasoned conclusion that your website is a cess-pool.


  2. Posted by Tough Love on March 11, 2013 at 3:04 am

    While the 2011 pension changes were indeed of minor financial consequence, It’s unlikely anyone but Gov. Christie would have done any better. Who else would have been willing to have an in-your-face confrontation with the Teacher’s Union ?

    There is near-zero chance of material changes UNTIL one domino falls …. meaning a pension Plan in NJ becomes insolvent, ACCOMPANIED BY the result that retirees’ pensions are actually reduced (ala Central Falls, Rhode Island). Until THAT happens, the Public Sector workers will never agree to any material givebacks because they don’t believe actual pension cuts will ever happen … even if Plan assets run out and we go to pay-as-you-go.

    So listen up Christie …. bravo for Step #1 ….. starving these grossly excessive Plans (BECAUSE they are unfair to Taxpayers). but don’t forget Step #2 ….INSIST that pensioners get an actual & material benefit cut when the first NJ plan becomes insolvent. That’s the ONLY way to fix the whole rotten system.


  3. Posted by muni-man on March 11, 2013 at 9:40 am

    There’s zero chance of paygo – annual payouts would be another 40% higher (~$11.6B) in 5 years at a 7%/yr. rate of increase. Pols would develop severe and permanent intestinal problems if they were faced with the prospect of trying to impose new taxes to the tune of $11.5B EACH AND EVERY YEAR (amounting to a tax addition of about another 33% of the entire state budget). That will absolutely never happen.

    I think they’ll be forced to realize the end is imminent after the next big market dump which is coming for sure. A 25%-40% fall lasting 12+ months and taking up around a full 24-30+ months (peak-trough-peak again) will send the plans into an unrecoverable tailspin, and that will force the pols to rejigger them into some form of DC-type system.


    • Posted by Tough Love on March 11, 2013 at 9:46 am

      It’s pretty sad that getting rid of the very unjust (to Taxpayers) Plans seems dependent on a big market downturn.


  4. Posted by Joel L. Frank on March 11, 2013 at 11:07 am

    Why didn’t Cris Christie extend the Alternate Benefit Program to include all public employees?


  5. Posted by Joel L. Frank on March 11, 2013 at 12:34 pm

    Did you know that the Alternative Benefit Program contribution rates was not modified with the 2011 reforms. The rates remain the same 8 percent for the employer and 5 percent for the employee.


    • Posted by Tough Love on March 11, 2013 at 1:13 pm

      The employer (meaning Taxpayer) contributions necessary to fully fund (over their working careers) the promised pensions under NJ’s current DB Plans (even w/o COLA) is 3-5 times the 8% under the ABP.

      The Unions would have freaked if Christie tried to shift CURRENT workers future pension accruals into the ABP.

      And yet that 8% APB (DC Plan contribution) is way better than what private sector workers get from their employers into their 401K Plans.


      • Posted by Joel L. Frank on March 11, 2013 at 7:59 pm

        The 8/5 percent split has been around since 1968. It was based to reflect, what the State of NJ was contributing to the DB system as a percent of covered payroll during that era. The 5 percent is a good reflection of the employee’s contribution—then and now to the DB system.

        The 8/5 percent contribution rate simply gave the ABP participant parity with the DB system. The law never allowed for a pension contribution holiday for the ABP like it allows for the funding of the DB system.

        If the 8 percent of covered payroll contribution was made for each of the last 45 years the DB Plan would be fully funded today and this website would not be needed.


        • Posted by Tough Love on March 12, 2013 at 12:00 pm

          You should educate yourself on pension funding (build some spreadsheets and try it). A total contribution of 8%+5%=13% of pay isn’t even close to paying for the total costs of the very rich formula (and rich provision) pensions over the working careers of those who receive them.


          • Posted by Joel L. Frank on March 12, 2013 at 1:00 pm

            TC, I already have. Please go back to 1968 and you will see that the 13 percent contribution resulted in full funding for the DB system. This is why 13 percent was elected for the Alternate Benefit Program.



          • Posted by Tough Love on March 12, 2013 at 1:13 pm

            Joel, In 1968, the formula benefits (the per year of service factor) were much lower, and the provisions (the current VERY early full retirement ages, the VERY heavily subsidized early retirements, the very liberal definition of “pensionable compensation”, etc) didn’t exist. Do you think these enhancements are free ? Each and every one is VERY costly.

            Even IF the 8% had been out in (in every year) we would STILL be woefully underfunded.

            Like I said, Educate yourself…….. or is it that you DO understand, but are one of those intentionally distorting the truth to delay the VERY much needed pension reform ?

          • Posted by Joel L. Frank on March 12, 2013 at 1:29 pm

            Please stop the personal attacks. I am saying that an 8 percent pay-in for each of the last 45 years results in full funding. It is up to you to tell us how much more, for each of the last 45 years was needed to maintain that full funding, for each of the last 45 years. It serves no purpose just to say many times more than 8 percent. Let’s keep this civil. Thanks, Joel

          • Posted by Tough Love on March 12, 2013 at 1:27 pm

            The link below (from a California blog) discusses/includes a valuable (Excel-based) pension analysis tool. Very flexible and can tailor specifics to NJ’s pensions. While not quite what actuaries would use (e.g., it uses fixed payout periods inputted to estimate average life expectancy rather that year-by-year mortality decrements), the results are quite accurate and especially useful in modeling various pension formula/provision and interest rate alternatives.

            A valuable tool for all of this sites readers …. but clearly for you, Joel.


          • Posted by Joel L. Frank on March 12, 2013 at 1:59 pm

            Why do you insist in not giving us a rate? I say it is 8 percent—prove me wrong. AGAIN, STOP THE SARCASM—IT SERVES NO PURPOSE!

          • Posted by Tough Love on March 12, 2013 at 2:29 pm

            Joel, Below are some calculations of the total cost (expressed as a level annual % of pay) to fully fund a career Public Sector worker’s pension over their working years. These were calc based on California’s pension’s, the 3% version clearly more generous than NJ pensions. The 2% per year of service pension %s are closer to NJ’s pension formulas (NJ Police Plans are higher). This is what you are looking for.

            Earnings 2 % per yr of service
            Rate w/o COLA W/COLA
            5% 29.3% 39.0%
            6% 29.1% 38.9%
            7% 29.0% 38.7%

            Earnings 3% per yr of service
            Rate w/o COLA W/COLA
            5% 43.9% 58.6%
            6% 43.7% 58.3%
            7% 43.5% 58.0%

          • Posted by muni-man on March 12, 2013 at 3:33 pm

            Plug the following inputs into a spreadsheet and see what you get for say a teacher. I’d say they’re very reasonable.

            Final Salary – $110,000; Average Salary over Career (for contribution purposes) – $55,000; Average Return/Yr. & Mo. – 6% & 0.5000%; Employee Contribution Rate – 5%; Contribution/Mo. Over Career – $229.17 ($55,000/12mos. X 5%); Years Service – 30 (360 months); Pension Amount – 54% x $110,000 =
            $59,400/yr.; Age of Retirement – 55; Expected Age at Death – 82; Years Collecting Pension – 27 (324 months); COLA – 1.5%/yr.

            You’ll find the following:

            Lump-Sum needed to fund a $59,400/yr pension for 27 years is:
            $784,706 (no COLA); $910,835 (1.5%/Year COLA)

            $82,500 – your total 5% career contributions for both no-COLA and COLA scenarios ($229.17 x 360 mos.)
            $230,201 – your total 5% career contribution value for both scenarios compounded monthly at 6%/yr. or 0.5000%/mo. over 360 months
            $554,504 = taxpayer funded portion required ($784,706 – $230,201) no COLA
            $680,634 = “ “ “ “ ($910,835 – $230,201)1.5% COLA

            Taxpayer-to-Employee Funding Multiple (no COLA) $554,504/$82,500 = TP funds 6.72x more than you
            Taxpayer-to-Employee Funding Multiple (1.5%COLA) $680,634/$82,500 = TP funds 8.25x more than you

            Now the good part. If you put in your 5% as above with 6%/yr. compounding, and taxpayers only had to put in 8% as you claim (or 60% more than your 5% contribution), then taxpayers would only have been required to put in $368,322 ($230,201 x 160%). The lump sum then available to fund your pension would have only been 230,201+$368,322 = $598,523, not $784,706 and your pension wouldn’t be $59,400, it would shrink to $45,300, a drop of 24% with no COLA and $39,000/yr. (34% less) with a 1.5% COLA over your pension lifespan. So this 5% employee, 8% taxpayer contribution scheme you mention as fully funding pensions isn’t even close.

            These pensions are unaffordable and that’s why they’re gonna flame out – NJ plan payouts increased 190% (from ($2.9B to $8.4B) in just the last 12 years which is beyond ridiculous by any stretch. NJ apparently agrees since it hasn’t tried to fund this lunacy. Underfunding and lousy market returns will nuke the plans before the decade’s out. Better start preppinf for it now.

        • Posted by Maceo on March 12, 2013 at 2:27 pm

          TL is a jealous troll. Don’t bother her with facts.


          • Posted by Tough Love on March 12, 2013 at 2:32 pm

            And what are are … a Public Sector worker who thinks you should own the Taxpayers checkbooks and deserve significantly greater total compensation (primarily via excessive pensions & benefits) than that your Private Sector counterparts?

            What is that necessary or justified ?

          • Posted by Joel L. Frank on March 12, 2013 at 4:28 pm

            The current final three year average salary is much lower than $110,000. More like 80k-90k. The 110 k is the current high and available in maybe 5 percent of school districts. The investment return since 1968 is much closer to 10-11 percent than the 6 percent.you use. Plug it in again and you will see that a 13 percent constant funding pattern would produce full funding over the last 45 years.

          • Posted by Tough Love on March 12, 2013 at 5:39 pm

            Joel …. You see, I said “educate yourself”. With the required funding expressed as a level of pay, the pay level Mini-man used in his example doesn’t matter … it’s all proportional.

            And a 10-11% 45-year average return, really, ….. with a balanced portfolio of fixed and equity investments ? Where, on “Fantasy Island” ?

          • Posted by Joel L. Frank on March 13, 2013 at 5:43 pm

            Here are the facts for the Public Employees Retirement System (PERS).
            These figures are from the Division of Pensions and Benefits website.

            1. As of July 1, 2011 there were 248,990 contributing members. There average compensation was $46,625.

            2. As of July 1, 2011 13,661 retirees were added to the rolls. Their total annual retirement allowance is $330,536,087.00. The average annual retirement allowance of these new retirees is $24,196.

          • Posted by Tough Love on March 13, 2013 at 6:12 pm

            Nice try Joel. The “average” you quote may be mathematically correct, but it is very misleading because:
            (1) It includes workers who retired many years ago on smaller salaries,
            (2) it includes part time workers with very low pay,
            (3) It includes short career workers with low pensions representing their short service,
            (4) it includes 50% survivorship annuities to spouses of deceased annuitants.

            That average, while commonly quoted by Public Sector Unions to hoodwink the citizens is irrelevant.

            The proper statistic is an Apples-to-Apples comparison of Public and Private sector average pensions ONLY from Full-Time, Full-Career (30+ year), recent (2012) retirees. When THAT comparison is made, the Public Sector pensions will always be double+ those of thier Private Sector counterpart.

            And, when the pension’s “value” at retirement is properly adjusted to reflect the MUCH earlier full retirement ages in the Public Sector, and the inclusion of post-retirement COLA increases (almost never included in Private sector Plans) that 2x multiple TYPICALLY increases to 4x .. and often 5x-6x for safety workers due to their even richer pension formulas.

            Joel, We can’t be BS’ed any longer. Just to stop digging the financial hole even deeper, for FUTURE service It’s WAY past time for very material (50+%) reductions in the pension accrual rate for CURRENT workers … and doing that still leaves the need for FURTHER givebacks to address the huge underfunding associated with PAST service accruals.

          • Posted by Joel L. Frank on March 13, 2013 at 7:56 pm

            Please go to the Actuarial Section of the Report and you will see these are the figures. During the fiscal year ended on 7/1/11 13,661 employees retired. These fixed retirement allowances combined are $330,536,087.00 which equates to an average retirement allowance of $24,196.00 per year for their first year of retirement.

            Do you also disagree with the published fact that the average salary earned by contributing employees was $46,625 as of 7/1/11?

          • Posted by Tough Love on March 13, 2013 at 8:33 pm

            OKj Joel, so they are recent retirees, but that group STILL includes groups (2), (3), and (4) of my earlier comment and hence is not representative of the pensions now granted full-time, full career workers.

            As to that $46.625 “average” pay of contributing members, it seems low. Can you tell me that is isn’t biased downward by the inclusion of many part time plan participant …. e.g., the Councilmen the in all NJ towns, the many many Board members, the connected freeloaders (oops, surely I meant Freeholders), as well as many run-of-the-mill part time workers ?

  6. Posted by Tough Love on March 11, 2013 at 2:06 pm

    John, Off -topic, but you have to see this to believe it. Check out the pension provision for CT judges. Here’s a quote:

    “Connecticut law awards a judge a pension of two-thirds of his annual salary when he turns 70. It does not matter if a judge served 20 days or 20 years”

    The Gov. just nominated a 67 year old . He’ll get a $100K lifetime pension after only 3 years.

    Here’s the article:


    Taxpayers are suckered everywhere. How about giving a greater priority in your blog to reducing these outrageous pensions (and the collusion between the Unions and the politicians granting them) rather than complaining that actuaries aren’t properly addressing Plan funding.


    • I’m not sure if this is the judicial plan referred to in the article:
      but under that plan you need 10 years of service to get anything, as I read it. I didn’t see any mention in the article to vesting so I question the 20-day thing.

      Though if it’s true it would be an interesting court case challenge if someone brought it in a CT court.

      As for this blog, whether public employees are getting too much is not my concern. There are plenty of people outside of government getting obscene compensation for various reasons other than merit. If salaries and benefits are obscene for some government workers then a major reason for it is the dereliction of the actuarial profession in valuing benefits properly and that’s my focus – either advocating for DC transparent costs or at least real Unit Credit funding for DB benefits.


      • Posted by Joel L. Frank on March 11, 2013 at 7:36 pm

        The law requires a periodic actuarial valuation of the assets of the public DB Plan. The actuary tells the employer that the plan is underfunded by $xxx and advises the employer to take care of this shortfall by making an additiional annual contribution of $yyy per year for 10 years. This is all fine and dandy except for the fact that the employer is free to take the advice or table it. If the state law required the public employer to follow the advice of the actuary this planned underfunding would never have become a reality. THIS IS WHAT IS WRONG WITH DB PLANS!!! Why does the law require this actuarial valuation but then allows the public employer to ignore the actuary’s advice based on the valuation? Why pay the actuary a fee if the professional’s advice is ignored?


        • The fee isn’t for professional advice. It’s for rubber-stamping felonious conduct and trading on the good name (for now) of the actuarial profession to mask that conduct.


  7. Posted by eatingdogfood on March 11, 2013 at 10:33 pm

    If The Democrats Didn’t Give ” Sweetheart Deals ” To Your Public Service Union.
    Goon Employees To Get Reelected; You Would Have Plenty Of Money and The.
    Taxpayer would have Some Spare Change in His Pockets! Democratic Hustler
    Politicians + Corrupt Union Goons = BANKRUPTCY BABY! Time To Bring.
    RICO Conspiracy Charges Against The Hustler Corrupt Democrats and the.
    Criminal Unions!


  8. Posted by Joel L. Frank on March 14, 2013 at 2:05 am

    (2) “it includes part time workers with very low pay”
    (3) “It includes short career workers with low pensions representing their short service”,
    (4) “it includes 50% survivorship annuities to spouses of deceased annuitants.”
    Assume 30 years of service: 1.67 percent X 30 = 50 percent X three year final average salary (FAS) of $48,392 = the average retirement allowance, as reported, of $24,196.


    • Posted by Tough Love on March 14, 2013 at 3:41 am

      Joel, Each of (2), (3), and (4) means that the average pension you are showing (of $24,196 from your earlier comment) is LESS than the average pension of recent Full-time, full-career workers …. BECAUSE the retirees in groups (2), (3), and (4) (who have the SMALLER pensions) would be eliminated from inclusion in the calculation of an average pension of only recent full-time, full-career retirees.

      My point is that the average pension of full-time, full-career recent retirees is higher (likely MUCH higher) than the $24K figure you are stating…. and that an average so calculated is what should be compared to the same average from comparable Private Sector workers.

      This isn’t rocket science.
      And where did the $48,392 figure come from? And isn’t it also low due to the inclusion of other than full-time, full-career workers ?


  9. Posted by Joel L. Frank on March 14, 2013 at 2:39 am

    For the fiscal year ended on 7/1/11 the average pay for contributing TPAF members was $70,746. The average annual retirement allowance for those retired during the f/y ended on 7/1/11 was $50,555.


    • Posted by Tough Love on March 14, 2013 at 3:48 am

      Joel, In an earlier comment (above) you said …”2. As of July 1, 2011 13,661 retirees were added to the rolls. Their total annual retirement allowance is $330,536,087.00. The average annual retirement allowance of these new retirees is $24,196.”

      Seems like you’re showing 2 different figures ($24,196 and $50,555) for the exact same thing. ?????????


      • Posted by Joel L. Frank on March 14, 2013 at 11:06 am

        I assure you a single? will suffice—you need to calm down!

        Having said that, the $24,196 is a PERS figure while the $50,555 is a TPAF figure.


        • Posted by Tough Love on March 14, 2013 at 11:32 am

          It would be interesting to see this same statistic for NJ Police pensions.


          • Posted by Joel L. Frank on March 14, 2013 at 12:43 pm

            “Seems like you’re showing 2 different figures ($24,196 and $50,555) for the exact same thing. ?????????” I responded by saying “the $24,196 is a PERS figure while the $50,555 is a TPAF figure.”.

            Having said that, why can’t you acknowledge that you should have seen from prior posts that one figure belongs to the PERS and the other belongs to TPAF? You would have seen the difference if you were not so driven to catch me. A “thank you” would go a long way in calming you. I assure you, I don’t need the “thank you” but you surely need the calming.


          • Posted by Tough Love on March 14, 2013 at 1:30 pm

            Joel, Thank you for clarifying that those “averages” were from different Plans.

            Do you know the same statistic from the Police Plan ?

  10. Joel Frank knows his stuff!


  11. Posted by Elsie on February 2, 2014 at 4:48 pm

    I just started my pension and my last 2 checks were 0.00 net pay! The reason for the deduction is a AFS SHORTAGE deduction. I don’t know what that is & I didn’t receive any explanation! Can anyone please tell what it is? Thanks.


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