Three More Myths About Public-Sector Pension Plans

The Manhattan Institute released a report by Richard C. Dreyfuss titled Twenty Myths About Public-Sector Pension Plans that brilliantly coalesced about 90% of the arguments I have been making in this blog over the last five years.  But they missed what might be the three most important (and uncomfortable to believe) myths…..

1) Interest rate choice need not consider funded ratio: Explained in a prior blog but basically it is a flaw in actuarial theory that presupposes 100% funding and provides ever more distorted results as funded ratios distance themselves from that 100% presumption.

2) Politicians have all the facts and know what they are doing*: Politics for many is a part-time avocation and for others it is a career path to benefits now and in the future.  It is not a job where issues need to be understood before actions are taken as long as any blowback is confined to some distant future.

3) Actuaries are independent: 7-year asset smoothing; open amortization; 8% interest rate for a 30% funded plan – these are not choices made by an independent professional looking for honest numbers but rather machinations thought up by professional dissemblers manipulating their craft to serve the purposes of their patrons.




* Based on personal experience primarily in New Jersey and Union County where reliance on ‘experts’ (both inside and outside official government employ) is the accepted norm regardless of how often those ‘experts’ seem to always (a) get it wrong and (b) benefit personally from decisions taken by these politicians they purchase access to.  Your experience may be different.

26 responses to this post.

  1. Posted by Anonymous on October 25, 2013 at 1:29 pm

    Hey John, is the pension system anymore underfunded or dishonestly run than the government itself? Why do people focus on it so much. The whole government system is a ponzi scheme or possibly worse.


    • Yes it is. Many other aspects of government are fairly easy to understand. For example, in New Jersey we pay an Assemblyperson $49,000. Nobody gets too upset about that. But what about the other $100,000 in pension and lifetime health benefits that they may be accruing (possibly using salaries from other government employment and only building up service credits) that are not being funded so current taxpayers don’t notice?

      Another reason for switching to Defined Contribution plans in the public sector. another


    • Posted by Tough Love on October 25, 2013 at 6:12 pm

      At least with respect to OTHER (equally poorly run) segments of NJ’s gov’t, Public Sector workers equally pay their fair share of the costs along with all other Taxpayers.

      When it comes to Public Sector pensions, the Public Sector workers have been promised WAY MORE than what’s fair or reasonable, and current (and future) Taxpayers are being financially “mugged” to pay for it.


  2. You nailed it, John, particularly #2 & #3. Elected officials know nothing about the actuarial assumptions or the implications of their optimism. Furthermore, they shop for the actuary who will give the the lowest ARC as if they’re somehow getting a bargain for the taxpayers.


  3. For nearly a half century the Defined Contribution plan has been the only type of plan available to the public-sector higher education crowd in New Jersey.


    • Posted by skip3house on October 25, 2013 at 4:19 pm

      That is so connected people can abuse the system.


      • Skip,
        I do not understand your statement


        • Posted by skip3house on October 25, 2013 at 6:44 pm

          DC continued this long because some public figures figured how to use it to their advantage, opposed to setting aside their own money in a 401k type. All public employees, not just higher ed,…..are in DC until recently?


          • Posted by skip3house on October 25, 2013 at 6:53 pm

            Looks like I have confused Defined Benefit with Defined Contribution? Sorry.

          • Skip,

            “For nearly a half century the Defined Contribution plan has been the only type of plan available to the public-sector higher education crowd in New Jersey.”

            For nearly 50 years this group has used the DC approach for both its primary and voluntary retirement savings plan.

            All of the other public employees in NJ are mandated into the Defined Benefit plan—they have always used the DC approach for their voluntary savings plan.

            Would you care to re-state your reply?


  4. Posted by skip3house on October 25, 2013 at 7:04 pm

    As stated 5:53,(6:53) confused the two, and did not pick up on your plan title….


  5. So why has this been the 50 year old policy of the State of New Jersey:? The higher education crowd is mandated into a Defined Contribution retirement plan and all the rest are mandated into a Defined Benefit plan.


    • Posted by Tough Love on October 25, 2013 at 11:10 pm

      If I recall correctly, DC Pensions were set up for University employees to accommodate plan continuity as professors moved between Universities, often in different States. TIAA-CREF manages almost all of these Plans.

      Also, the VERY generous (more appropriately described as grossly excessive by any reasonable measure) DB Plans common today were far less generous many years ago, so the DC Plans offered to University workers were not looked upon as inferior.


      • A secretary working for a Rutgers University professor is as mobile as a secretary working for a K-12 principal. Yet the former is mandated into the DC plan while the latter is mandated into the DB plan. So the mobility argument goes just so far. Surely the public-sector workforce in New Jersey is much more mobile today than 50 years ago. So why not mandate all public employees into the DC arrangement as their primary retirement planning vehicle?


        • Posted by Tough Love on October 26, 2013 at 10:31 am

          I would love to see all future AND current Public Sector workers shifted into a DC Plan with benefits comparable to what Private Sector workers get.

          Expect the Unions to fight any such attempts like mad dogs, as their current pensions are easily 3-5 times what they would get under such DC Plans. In addition, the Politicians generally don’t encourages such changes because they can’t curry favor (and hence VOTES) from from the Unions under such Plans.


          • They already fought like “mad dogs” and their DB formula, for those hired on or after 6/27/2011, has been reduced. After you look up the new current formula you may want to retract your “easily 3-5 times” assertion.

            That said, the current funding ratio for the DC plan has been in place for 50 years. 8 percent of salary is contributed by the state and 5 percent is contributed by the participant. Does this meet with your approval?

          • Posted by skip3house on October 26, 2013 at 2:12 pm

            Per the many thoughts here over the years, I’d like to see simply a ‘contribution’ plan of volunteer contributions by the employee, and employer, public and private..
            The resulting contributions have to show on every pay stub, and separate statements from the investments chosen by that employee as contracted between employee and ‘banker’.

          • Posted by Tough Love on October 26, 2013 at 10:38 pm

            Responding to joelfrank ….

            Actually, only the cheaper Public Sector Plans (those generally applicable to “micsellaneous” employees) fall in the 3-5 times range I quote above. 4-6 times would be more accurate for safety workers.

            The flaw in most people’s thinking (in comparing Public to Private Sector Plan generosity) is looking only at the monthly pensions. That logic is flawed because it fails to factor in the MUCH MUCH richer (and hence COSTLY “provisions” typical of only Public Sector pensions …. e.g. collecting an unreduced pension at age 55 vs 65 in Private Sector Plans, and (until recently in NJ, but still the norm everywhere else), the inclusion of post-retirement COLA increases, a provision almost non-existant in Private Sector pensions.

            I also noted that you glossed over the fact that almost all DB reforms to date impact only NEW workers. Well, that will save next to nothing until those workers begin to retire 20-30 years in the future. To effect the very material cost reductions needed NOW, DB Pension reform must include the FUTURE service of all CURRENT workers.

            An no, I have no problem providing Public Sector workers with 8% of pay in retirement benefits …. as long as later administrations cannot increase it. While the 8% is quite a bit more than what the typical Private Sector workers gets from his/ger employer, it’s a huge decrease from the financial “mugging” the Taxpayers are taking today and which will accelerate in magnitude unless GENUINE pension reform takes hold.

          • Posted by Anonymous on October 28, 2013 at 12:12 pm

            And let’s not forget that the politicians are enrolled in these overly generous plans as well. Even the criminal politicians get paid well. In the public sector crime does pay

        • Posted by Anonymous on October 28, 2013 at 12:14 pm

          Mobility? Are you kidding? You can’t pry publics away from these positions. Most if not all are lifers. Way too many doing way too little for way too much!


          • Posted by Rick on October 28, 2013 at 2:47 pm

            Tough Love: do you have data to back up the assertion that public sector retirement outcomes would be “3-5 times” less if going from DB to DC? It’s not that I doubt your statement (actually, I have no idea), but if I’m going to use a number, and I would in this case–I’d need written back-up.

            I was in touch with some people implementing the DB to DC conversion for Michigan civil servants in Michigan during 1997-8, and I recall no hue and cry about it. My understanding is that the unions didn’t fight it, the employees’ questions were mostly just about the mechanics, and since then there’s been little talk about it–it’s just a fact of life. The costlier DB system for the educational employees was not changed, and I attributed that to the fact that the teacher’s union had some clout, and I attributed THAT to the fact that there had been some wildcat teacher strikes in Michigan during the ’80s. The teachers still have DB.

            I believe the State DC contribution rate is 4%, I could be wrong about that.

            Anonymous: one of the original HR purposes of DB was specifically to foster career longevity. Within the public sector bureaucracies–that was seen as a valuable outcome. The reasons for that may now have vanished with economic change–I think they have–but it is not quite correct to disparage people for responding as expected to the economic incentives that have been explicitly and deliberately provided to them.

            During the ’60s, ’70s, and ’80s, when a public employee was hired, he/she was usually just informed of the retirement system without fanfare. There was no hint that it could be changed, (it was, after all, in law or ordinance), it was not a subject of union contractual negotiations (because it was in law or ordinance), and the employees mostly just shrugged and went about their business. Then, twenty or thirty or forty years later, they find out that they’ve been told lies….

          • Posted by Tough Love on October 28, 2013 at 7:21 pm

            Responding to Rick.

            My “3-5 times” conclusion comes down to this …. the Taxpayer’s share of total Public Sector pension contributions (expressed as a Level Annual Percentage of cash pay) required to fund the typical Public Sector Defined Benefit Plan over the working live of the covered workers is generally 3-5 times greater than what reasonably would be contributed (by Taxpayers) to Defined Contribution Plans on their behalf. And to be clear, even if Taxpayers made the 8% DC Plan contribution referred to earlier (a percentage considerably greater than what Private Sector taxpayers typically get from their employers), indeed, typical current DB Plans are in fact 3-5 times more costly, easily requiring a Level Annual contribution of 24-40% of cash pay (and with even greater contributions needed to fund the richer pensions promised Safety workers).

            If you are willing (and capable) of a bit of work, you can easily prove it for yourself. The following link includes a pension calculator spreadsheet. While you need a basic understanding of EXCEL, it quite easy to “solve” for the Level Annual % contribution required to fund a DB Pension as defined by your inputted assumptions. While this spreadsheet is considerably simpler than what actuaries use to do such calculations (e.g., using period-certain annuities of duration equal to life expectancy instead of annual mortality rate decrements from a mortality table), it produces results not much different than those which would result from more complicated calculations. And a suggestion, the goal is to get the green cell in the spreadsheet as close to zero as possible. Using EXCEL’s “goalseek” function makes doing so a great deal easier than trail-and-error testing.


          • Most of the DC plan participants at the public higher education institutions are also lifers

  6. Posted by Javagold on October 27, 2013 at 6:00 pm

    $0.16 on the $. coming to a public taker Ponzi pension near your …..


    • Posted by Anonymous on October 28, 2013 at 5:56 pm

      Which really would result in a “united welfare states of america” as most of the pensioners are forced onto public assistance. But I’m sure this scenario can only help Java to sleep soundly at night.


  7. Posted by Rick on October 28, 2013 at 11:37 pm

    Tough Love: I now understand you were speaking of inputs (contributions) rather than outputs (benefits received). When you said “their current pensions are easily 3-5 times what they would get under such DC Plans,” I assumed you were speaking of benefits received. Actually, I don’t have to run the calculator, because I think that, if we are talking of contributions, the 3-5 times figure is likely–and, in fact, that is one of the major reasons I favor DC. By the way, when Michigan went to DC for the civil servants, they offered current employees a buy-out based on the actuarial present value. The assumptions were never (to my knowledge) revealed. Some of the employees took it. Some probably regretted that decision in 2008. Risk is ever-present in economics.


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