SOS Christie on New Jersey Pensions

It stands for State Of the State addresses by New Jersey Governor Christie over the last four years but it could have other meanings.  From the January 11, 2011 address where the choices are Reform or Disaster to the 2014 address where we need to make more choices, whatever they might be, excerpts from those speeches on the Pension and Benefits issue show where we have been taken:

January 11, 2011: “reform today or risk disaster tomorrow” – 4:29 with two interruptions for applause totaling 30 seconds
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January 17, 2012: “a model for America” – 59 seconds with one 11 second interruption for applause
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January 8, 2013: “path to restored health” – 2:59 with two interruptions for applause totaling 45 seconds and including a standing ovation by half the room on the first
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January 14, 2014: Time to “engage in those conversations” – 2:51 no applause
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SOS indeed – only worse with four years lost and the hole deeper.

50 responses to this post.

  1. Posted by Anonymous on February 20, 2014 at 11:54 am

    So are the pensions fine or not? Not a fan of Christie but at least he is putting it there.

    Reply

  2. About 10 years ago the State of Florida passed a law allowing current employees to change their participation from the mandatory DB plan to a new DC plan. This law was unique because it provided for a transfer, in dollars, of the accrued benefit in the DB plan. Newbies have the right to choose either plan. It is also unique inasmuch as the law allows one to change his/her mind once in their career.

    That said, is this doable in NJ?

    Reply

    • Posted by Tough Love on February 20, 2014 at 12:34 pm

      That would be a horrible idea in NJ and seriously exacerbate the underfunding problem. Here’s why…………….

      Assume our Plans are 50% “funded” on a reasonably conservative basis. What new retiree (with even half a brain) who has been promised say $1,000,000 in (lump sum Present Value for which on average the plan only has $500,000 of assets in hand to cover that obligation) pension benefits, would not elect to take the entire $1,000,000 and roll it into a 401K Plan, no longer being at risk of the DB running out of money?

      There would be a race to retire, with almost all taking the cash payout and a dead Plan probably within 1-2 years.

      Reply

      • Where does the new retiree, you refer to, find a 401(k) Plan? He/she wants to retire not to continue working. I think you meant an IRA, no?

        That said, a million dollar reserve guarantees a 65 year old NJ pensioner $106,540 per year. How can this money be invested inside of an IRA to generate the same income for life?

        Reply

        • Posted by Tough Love on February 20, 2014 at 2:30 pm

          Yes of course (brain freeze on my part). I meant a rollover IRA, quite commonplace for Private Sector workers taking Lump Sum distributions from DB Plans.

          Not sure if your quoted example in Florida allowed such a real “cash-out”… with the funds actually leaving the Plan (and not going under a “DC” label but still under the control of the Plan and still subject to reduction if the overall Plan failed). Other than in the very late 1990s (when most Plans were near 100% funded), I don’t know how Florida could have (or should have) offered such a conversion.

          For $1,000,000 to generate $106,540 annually for life (With ZERO post-retirement COLA increases) …. a life annuity factor of $1,000,000/$104,650=$9.56 is implied. That would only result from use of an up-to-date annuity mortality table with a VERY high interest rate of about 7.5-8%. Only in the Public Sector Plans does such craziness exist.

          Using a more realistic interest rate of say 5%, the life annuity factor would be closer to $12-$12.5 (per $1 of annual payout), so $1,000,000 would generate about $82,000 annually …..still generous annual $$ (off a $1,000,000 base), but remember that each payment is part return of principal and if you die soon after retiring with a life annuity, you received little and your heirs get nothing. That’s why many many articles are written about the pros and cons of taking a lump sum pension payout vs a Life Annuity.

          As to your question, you certainly can’t, without great risk inappropriate to a retiree w/o lots of OTHER assets to draw upon, expect to earn 10.65% (from your $106,540 figure) or 8.2% (from my $82,000 figure), but by taking the $1,000,000 (and rolling it into your own IRA) you eliminate the risk of a pension reduction from Plan failure later on……which is not a small possibility for a Plan that is (with appropriate assumptions and using “market” value of assets) only 50% funded today.

          Nobody said that judging how material that risk is would be easy.

          Reply

          • Yes Florida did transfer the DB accrued reserves to the DC account for those that decided to make the switch. Check it out—the DC plan is one of the best in the nation and the financial education commitment is spot-on.

            In my view not everyone close to or about to retire would take the lump-sum. It would be acted upon, primarily, by those who are 10 years plus from retiring and the unborn.

        • Posted by dentss dunnagan on February 20, 2014 at 5:07 pm

          That’s over 10% a year ..Impossible return , even junk bonds pay only about 6%

          Reply

          • 10.65 per $100.00 is the annuity income rate used by the NJ Division of Pensions and benefits for a 65 year old. Remember each monthly payment is comprised of interest and a return of basis/initial reserve i.e. $1 million.

    • Posted by Maceo on February 20, 2014 at 12:45 pm

      In NJ the end result should be a hybrid plan eventually shifting to a dc plan. If you make an immediate shift to a dc plan there is no funding for a db plan. The main problem is the wolves are guarding the hen house. As long as politicians decide the fate of their own pensions we are in trouble. They leave office and shuffle from board to authority to commission until they arrive at pension heaven (Port Authority). If pensions were capped and all elected officials were quarantined to their own self- funded pension system real change could happen. The Christie/Sweeney reforms passed to “save the pension” resulted in the state taking the extra employee contributions to lower the accrued liability. Instead of putting the extra money into the system they collected less from towns because on paper the system was supposed to get better. The reforms scared a generation of workers into early retirement further straining the system. Christie’s main problem is he had no intention of being around beyond 2014 when the bills got too big to handle. Now that it looks like he is stuck in the swamp he has to admit that his plan failed miserably (or shop for a friendly actuary).

      Reply

      • Posted by Tough Love on February 20, 2014 at 3:46 pm

        Quoting….”In NJ the end result should be a hybrid plan eventually shifting to a dc plan. If you make an immediate shift to a dc plan there is no funding for a db plan. ”

        While I agree that the wolves are guarding the hen house, the above often-quoted reason for NOT switching from DB to DC plan is a is understood fallacy.

        What the TAXPAYER’S owe towards already accrued pensions for PAST service has nothing to do with Plan changes for FUTURE Service and nothing stops the Taxpayers from continuing to amortize any unfunded liabilities for that PAST service, just as they would/should if the DB Plan was not frozen. And for the investment-savvy, the argument that a Plan Closing will shorten average working career durations necessitating the need to invest shorter-term (with lower expected returns) has been artfully challenged, there being no overriding need to change investment objectives and/or asset allocations.

        Arguments that DB Plans can’t be closed because the continued DB contributions of current workers are necessary imply either:

        (a) that the employee is contributing MORE in a given year than the value of that year’s accruals for that SAME worker and that the excess is available to fund current payment retires and to those soon to be retired, or
        (b) that it is OK and reasonable for the employee’s contributions, ALL of which are necessary toward the funding of THAT employee’s accruals, be instead used to pay the pensions of current retirees and those soon to be retired,

        Clearly BOTH (a) and (b) are false. (a) is false because the worker’s contributions RARELY pay for more than 10-20% of total Plan Costs (nowhere near the full cost of new annual pension accruals for that same employee) and no part of their annual contributions is “available” to fund the pensions of current retirees. (b) is false because diverting an employees own contributions (considerably inadequate in and of themselves to fund the annual incremental value of their own pension accruals) to fund current retiree pensions is effectively stealing from the “actives” to pay the “retireds”,leaving the actives in great jeopardy of significantly reduced pensions when they reach retirement. Doing such is the classic Ponzi-scheme.

        Reply

  3. Posted by Maceo on February 20, 2014 at 5:42 pm

    TL, How do you account for the compounded contributions of the employee who contributes 200k over a 30 year career which is supposed to be matched by the employer? You project the employee contributions (ignoring compounding) are the only funding to be considered. How about a constructive detailed suggestion for once.

    Reply

    • Posted by Tough Love on February 20, 2014 at 11:27 pm

      Maceo, Good question. They way I “account for” (a better description being “evaluate the reasonableness of”) the compounded contributions of the employee who contributes 200k over a 30 year career is first to determine what those annual contributions (compounded WITH interest) would accumulate to at the end of that 30 year career, and second, to calculate the level annual % of pay contributions needed from the employer (meaning Taxpayers) such that when added to the employee’s contributions, the TOTAL (ER + EE) accumulation at retirement is sufficient to fully fund the promised pension.

      Next, I look at the share of the total accumulation necessary to fund that promised pension that comes from the employee and from the employer (i.e., taxpayers). Typically, the worker’s own contributions tend to pay for 10-20% of the promised pension, with Taxpayers responsible for the 80-90% balance.

      And finally, I look at the Taxpayer’s responsibility expressed as a level % of pay, and compare that to what comparable Private Sector workers typically get in retirement contributions from their employers (again, as a level % of pay). When doing so, invariably, the Taxpayer’s responsibility toward fund Public Sector pensions (as a level % of pay) is multiples greater than what they get from their employers. With Cash pay in the Public and Private Sector now very close, and with EQUAL “Total Compensation” (cash pay + pensions + benefits) as a reasonable goal, I find no reasonable justification for ANY greater Public Sector pension (or better benefits) let alone ones that require multiples greater Taxpayer contributions.

      While I develop my own spreadsheets to do such calculations a very useful spread for such calculation is available here (in the blue linked “pension_analysis_model” ) in this article:

      http://californiapublicpolicycenter.org/a-pension-analysis-tool-for-everyone/

      As to a constructive suggestion ….. Clearly, by any reasonable comparative metric, Public Sector pensions are grossly excess, unnecessary to attract and retain a qualified workforce, and unjust to Taxpayers called upon to pay for 80-90% of total Plan costs. While reducing PAST Service pension accrual is politically, legally, and practically very difficult (even though excessive) absent a bankruptcy proceeding, I feel we MUST materially (by at least 50%) reduce the rate of pension accrual for the FUTURE Service of all CURRENT workers. This is NECESSARY to stop digging the financial hole we are in even deeper …every day. And even AFTER such 50% reduction, the resultant Public Sector pensions would STILL be more generous than the vast majority of those available to Private Sector Taxpayers.

      Reply

  4. Posted by Maceo on February 21, 2014 at 9:32 am

    TL- The employee contributions cover let’s say 20 per cent of the cost and the taxpayer pays 80 per cent. Where does the compounded interest of the employee and employer contributions go?

    Reply

  5. Posted by Tough Love on February 21, 2014 at 9:50 pm

    Let me answer that by way of a specific example which I worked-up in an easily duplicated Excel Spreadsheet ………

    Assumptions:
    (1) employee starts with a $20,000 salary in year 1, and 30 years later his final salary is $100,000. Also assume that the rate of salary increase is the same in each year. Starting with $20,000 and ending at $100,000 30 years later, translates into a compound annual salary increase rate of 5.7067%, which seems reasonable over a recently ending 30 year period
    (2) Retiree lives for 25 years in retirement. This seems like a reasonable scenario for a worker who starts in the mid-late 20s, works for 30 years and survives in retirement for 25 years.
    (3) Employee contributions are a level annual 7% of pay
    (4) Investment earnings on accumulating employee and taxpayer contributions are 6% in each year during the 30 year working period and are assumed to be 5% of outstanding fund balances during the 25 years in retirement
    (5) starting pension is 75% of final pay or $75,000
    (6) Pension payments and interest crediting are assumed to occur at the middle of each year.
    (7) Annual COLA increases of 2.5% annually in retirement. Results are SHOWN TWO WAYS (demarcated by the 2-nd two the dashed-line sections below), WITHOUT COLA increases, and WITH 2.5% annual COLA increases

    With that particular set of assumptions (all of which are spreadsheet “inputs” and easily changed) we hare the follow results:

    (1) Total dollar amount of employee contributions (WITHOUT interest) over the 30 year working period = $105,131
    (2) Total amount of employee contributions (WITH interest) with each payment accumulated at 6% to the end of the 30-th year = $225,137
    ——————————————————————–
    (3) Assuming NO COLA pension-payout increases, the fund required at the end of the 30-th year (along with future-year interest at 5% on fund balances) to make each of the 25 (midyear) pension payment and run the fund down to zero at the end of the 30-th year = $1.060,140
    (4) Assuming NO COLA pension-payout increases, the RESULTANT level annual %-of-pay Taxpayer contributions = 25.96%
    (5) Assuming NO COLA pension-payout increases, total dollar amount of Taxpayer contributions (WITHOUT interest) over the 30 year working period = $389,915
    (6) Assuming NO COLA pension-payout increases, total amount of Taxpayer contributions (WITH interest) with each payment accumulated at 6% to the end of the 30-th year = $835,002
    ——————————————————————-
    (3) Assuming 2.5% annual COLA pension-payout increases, the fund required at the end of the 30-th year (along with future-year interest at 5% on fund balances) to make each of the 25 (midyear) pension payment and run the fund down to zero at the end of the 30-th year = $1.349,651
    (4) Assuming 2.5% annual COLA pension-payout increases, the RESULTANT level annual %-of-pay Taxpayer contributions = 34.96%
    (5) Assuming 2.5% annual COLA pension-payout increases, total dollar amount of Taxpayer contributions (WITHOUT interest) over the 30 year working period = $525,106
    (6) Assuming 2.5% annual COLA pension-payout increases, total amount of Taxpayer contributions (WITH interest) with each payment accumulated at 6% to the end of the 30-th year = $1,124,514

    I believe the most relevant figures are what the Taxpayers must contribute (as a level % of pay) to fully fund this worker’s pension (as described above) over his working career. Those %s are 25.95% if there are no post retirement COLA increases and 35.96% with 2.5% annual COLA increases.

    My strong advocacy for material reductions in the FUTURE service pension accrual rate for CURRENT workers sources back to %s such as these, which are multiples greater than what Private Sector employers typically contribute (as a % of pay) towards THEIR workers’ retirements….. that being their 6.2% of pay Social Security contribution on the worker’s behalf, plus a 3-5% of pay “match” into a 401K Plan.

    With public Sector workers earning no less than their Private Sector counterparts in “cash pay”, and EQUAL “Total Compensation” (cash pay + pensions + benefits) as an appropriate goal, I see no justification fro ANY greater pension (or better benefits) let alone ones that are MULTIPLES GREATER in cost to the Taxpayers.

    Reply

    • Posted by Tough Love on February 22, 2014 at 12:24 am

      Correction ……. the WITHOUT-COLA 25.95% and the WITH-COLA 34.96% level annual % of pay required from the Taxpayers in my above work-up should have been 26.67% and 36.24% respectively.

      I corrected a spreadsheet error in which the fund balance was being run down to zero BEFORE the final pension payment. This correction reflects the fund balance running down to zero AFTER the final pension payment.

      Reply

  6. Posted by Tough Love on February 23, 2014 at 2:41 am

    John, I respectfully request that you act as a “teacher” to keep the discussion honest and perhaps to right some of the many many falsehoods that inundate these pension reform discussions.

    Lately, I have read quite a few articles blaming the significant CalPERS increases in employer contributions on longer life expectancies and the need to update mortality table … to the effect of have a 2 year longer life expectancy (by 2028) than from use of current tables. The “cost increases %s” in these articles seemed impossibly high, so I decided to “run the numbers”.

    For the detailed scenario I described above, if instead of the retiree living for 25 years, he lived for 27 years, the level annual TOTAL (EE + ER) % of pay requirement would have increased from 26.67% and 36.24%, to 27.98% and 38.70% respectively, significant, but FAR lower than the cost increases that CalPERS suggests are necessary.

    Clearly, CalPERS is trying to hide some of their past mistakes under cover of longevity increases.

    It’s up to the well informed (such as yourself) to limit such lies by them know that they will be exposed.

    Reply

    • I haven’t been following CALPERS so it would take some study to catch up to what they’re doing but first impression is that if the normal form of benefit is a J&S a two year increase in mortality would also apply to the Survivor portion raising the Annuity Factor more than if it were only a Life Annuity.

      Reply

      • Posted by Tough Love on February 23, 2014 at 1:14 pm

        Since the spousal death might be say 5 years later than the retiree, if the new tables include projections scales for ongoing mortality improvement, that effect (a greater increases) would be lightly. Another possibility was that if they are assuming life expectancy is 2 years higher by 2028, that’s only 14 years in the future so the impact (with projection scales) would be greater than my calcs going from 25 to 27 years in retirement.

        If I recall correctly, one article that caught my eye suggested that “costs” would go up 32% (without defining exactly was what meant by that), and in another, the need for a 9% increase in the employer %-of-pay contribution. Both seems impossibly high. CalPERS is indeed an extreme case, as they appear to possess the power/authority to make actual policy and decisions with material financial implications. Combine that with a Board that is almost entirely composed of Retired Public Sector workers and it’s a recipe for Taxpayer heartburn and less than truthfulness and full disclosure.

        Reply

  7. The NJ defined benefit system works as follows: The employee pays in bi weekly for let’s say 35 years. This money is invested in a multi-billion dollar portfolio earning an investment market return. Let’s assume an average annual return of 8 percent.

    The employee’s annual Annuity Savings account statement shows the annual contribution made and the 4.0 percent interest it earned. Should the participant die in service the survivors are only entitled to a return of his/her own contributions made to the Annuity Savings Fund with the statutory 4 percent return NOT the larger actual return of 8 percent.

    Should the participant live to retire his/her Annuity Savings account balance is used to fund the needed Pension Reserve account. Some would have us believe that the State funds the lion’s share of the initial Pension Reserve account and, thus. the pension. This is true if you use the 4 percent return the employee’s accumulated contributions earned for in-service death benefit purposes.

    To determine the portion of the Pension Reserve funded by the employee’s Annuity Savings account balance we must first factor in the 8 percent return the accumulated savings/contributions really earned. We will then see that the retiree is really funding about 50 percent of his/her initial Pension Reserve account and, thus, his/her pension.

    Reply

    • Posted by Tough Love on February 23, 2014 at 8:18 pm

      That’s incorrect.

      If you look at the long example I gave above dated 2/21 @ 9:50 PM (with the correction immediately following) with 6% earning rate during the accumulation period and 5% during the payout period (and with a 7% of pay assumed employee contribution), the employee/Taxpayer split of total Plan costs is (under the with COLA version) …. 16.2% employee and 83.8% Taxpayer. If the 6% is replaced with 8% during the 30-year accumulation period, the split would change to ……. 21.8% employee and 78.2% Taxpayer. And if interest rate were changed to 8% in BOTH the 30 year accumulation period AND the 25 year payout period (a crazy assumption by any reasonable standards), the split would change to …. 29.3% employee and 70.7% Taxpayer.

      I’ll wait for you to not SAY I’m wrong, but demonstrate it. Talk is cheap.

      Reply

      • I am zeroing in on the false assumption that the initial Pension Reserve is funded primarily by the employer. This is factually wrong when you factor in the actual investment returns earned on employee contributions. The 4 percent rate in my post is set by statute. We need to know the average annual rate of return on the investments for the last 35 year period and include that return in the employee’s Annuity Savings account balance. When we have that Savings balance then and only then can we determine the portion of the initial Pension Reserve funded by each contributor, the employee and the employer.

        Recognizing that not all employees live to retire or collect their pension long enough to collect a meaningful COLA I have eliminated the COLA in my discussion. Again, I just want to emphasize the portion of the initial Pension Reserve funded by each contributor, the EE and the ER.

        Is it possible to get the annual investment returns for each of the last 35 years? This is what we need.

        Reply

        • Posted by Tough Love on February 24, 2014 at 12:37 am

          Since we are talking about the EE/ER share of total pension costs, my example develops the financials of a pension (from scratch) with the calculation determining the Taxpayer’s contribution necessary to fully fund the pension over the 30-year working period once the the employee’s contribution rate is set (inputted) along with inputs for investment return, the starting pension %, and the annual COLA increase %. From that the EE and ER shares fall out.

          What I stated above is correct. In fact, I ran some scenarios to see what it would take to actually arrive at a 50-50 EE/ER split.

          Here’s the answer:

          The pension would have to drop from 75% of final pay to 60% (meaning a 2% per-year-of service factor applicable to ALL years …. meaning no increasing factors for long service), the employee contribution would have to increase from my original assumption of 7% of pay to slightly over 9.5% of pay, and the investment return would have to be 8% for all 55 years (30-year accumulation period and 25 year payout period). I’m sure you would agree that that’s a VERY VERY unlikely scenario.

          Now, if your intent was to say that BECAUSE NJ has historically underfunded it’s pensions (meaning paid less than it’s proper actuarially determined share of the contributions necessary to fully fund it over the employees working career), that much less investment earnings have been generated on their contributions, that would be correct. However, that WOULD NOT change the “EE/ER SPLIT because with the EE share FIXED (as a % of pay), the ER share is simply the balancing item with the unfunded liability (which is entirely an IOU of the EMPLOYER) including BOTH it normal share PLUS any deferred principal as well as the increased interest on payments not made. So essentially, the non-payment or short-payments by the Employer is simply a time-value-of-money issue for the taxpayers and has no impact on the EE/ER share split.

          And yes, my results would change if I assumed no COLA increases (I didn’t run those scenarios), I Included the COLAs for 2 reasons: (1) It now looks like they will be reinstated in NJ, and (2) pension reform discussions shouldn’t focus on outlier situations (as such results can mistakenly be projected to apply to more common situations), and COLAs are are standard elements of virtually ALL Public Sector pensions (while non-existent in almost all Private Sector pensions).

          In any event, your statement “Recognizing that not all employees live to retire or collect their pension long enough to collect a meaningful COLA I have eliminated the COLA in my discussion.” makes little sense and clearly biases your result, as were talking about averages and ALL retiree payments will include COLAs to (on average) the group’s life expectancy…. which is EXACTLY what my calculations do.

          Reply

  8. You are talking about total pension costs.

    That said, I am not.

    I am talking about the establishment/funding of the initial Pension Reserve for someone retiring today at age 65 after 35 years service. Assume a Final Average Salary of $85,000. The pension calculation is .0167 X 35 X $85,000 = Pension of $49,683. This pension requires an initial Pension Reserve for a 65 year old of 9.8 x $49,683 = $487,000. How much of this Pension Reserve is EE money and how much is ER money? This can only be answered if we know the dollar amount of the bi-weekly contributions made by the EE over the last 35 years and the investment return of the investment holdings for each of the last 35 years. If we simply say the EE’s Annuity Savings account balance today is $100,000 we come to the conclusion that the EE contributed just 20 percent of the initial Pension Reserve ($100,000 divided by $487,000). This is the wrong conclusion because the $100,000 includes just 4 percent annual growth which is less than what the investment holdings earned over the past 35 years.

    Reply

    • Posted by Tough Love on February 24, 2014 at 10:14 pm

      That’s very clear, thanks for the clarification.

      My comments ……..
      (1) In an earlier comment, you said …”10.65 per $100.00 is the annuity income rate used by the NJ Division of Pensions and benefits for a 65 year old. “. Using that relationship, what you are calling the “Initial Pension Reserve” necessary to fully fund the $49,683 annual pension over the 35-year working career would be calculated by solving for “Z” in the following equation: ($10.65/$100)=($49,683/Z). Solving for “Z” gives $466,507, so I don’t know where the 9.8 factor came from to arrive at $487,000. In any event I will use your $487,000 figure in the following comments
      (2) You used a retirement age of 65, which is perhaps 5 years older than the typical retirement age of NJ Public Sector retirees (especially ones with long-service careers). That impacts the survivorship duration in retirement, so I will now assume the workers survives only 23 years in retirement to age 83
      (3) You used a formula factor of 1.67 per year of service. I’m guessing that that is applicable to one of the lowest formula Plans in NJ, and certainly lower than what the average factor would be if all of NJ’s Plans were averaged. A richer Plan means a greater Level Annual TOTAL contribution requirement, and if the EE contribution rate is fixed, then the ER contribution rate must increase as well as the ER’s SHARE of the total cost.
      (4) For calculation purposes, I’ll assume the workers 1-st year salary was $15,000 increasing to $85,000 in the 35-th year. That implies a level annual salary increase rate of 5.2341% which seems reasonable.
      (5) Using the 35-year working period, retirement at age 65 with a 23 year (life expectancy) pension payout period, and salary as described in # (4) above, I SOLVED for the level annual TOTAL (EE+ER) contribution (as a LEVEL % of annual pay) necessary to fully fund the $49,683 annual pension over the 35-year working period. This calculation was done using interest rates ranging from 5% in all years to 13% in all years. In addition, these calculations were made twice, WITHOUT and WITH a 2.5% annual COLA increase. For EACH separate calculation, the result shows the level annual TOTAL (EE+ER) contribution % required, along with the “Initial Reserve Required” (meaning, the funds that are needed in hand at the time of retirement to fund all future pension payments … using the assumptions for THAT calculation. The following is a table of these results (hopefully it will come out in readable rows and columns once posted):

      Interest Without COLA With 2.5% annual COLA
      Rate In Level Annual Initial Reserve Level Annual Initial Reserve
      All Years Total (EE+ER) % Fund Required Total (EE+ER) % Fund Required
      5% 29.57% 703,653 37.31% 887,862
      6% 23.97% 647,938 29.95% 809,557
      7% 19.37% 599,233 23.97% 741,599
      8% 15.59% 556,481 19.12% 682,382
      9% 12.51% 518,806 15.20% 630,576
      10% 10.01% 485,475 12.06% 585,077
      11% 7.35% 455,874 9.54% 544,964
      12% 6.35% 429,488 7.54% 509,464
      13% 5.05% 405,882 5.94% 477,932

      From that table you can see that in the WITHOUT COLA version (the 2nd and 3rd columns from the left), your $487,000 Initial Reserve would only be sufficient (to fully fund this pensions) if PLAN Assets earned almost a 10% investment return in all years (and a return of almost 13% under the WITH COLA version). If the monumental task of achieving a 10% return in all 35+23=53 years were indeed accomplished, with the indicated (from the table) 10.01% level annual TOTAL contribution necessary to fund this pension, then YES, the total cost would indeed be split 50/50 if the workers contributed a level annual 5% of pay (half of the 10.01%). As a Financial Planner by profession, do YOU think this scenario is even remotely possible?

      Based on the above table, I’m assuming the $487,000 is what the NJ retirement system says it needs (to fund this pension) assuming no COLAs (as the WITH COLA alternative, requiring a 13% investment return, is even more absurd).

      To show from an unbiased outside source that the $487,000 is WAY to low to fund a $49,683 life annuity to a 65 year old, I went to the immediateannuities.com website to see how much up from money they would require to issue a $49,683 annual payment life annuity to a 65 year old male. The answer was $700,081. From my table above, that $700,081 requirement corresponds to an investment return of just UNDER 5%, certainly more reasonable for a promise of a guaranteed stream of payments with almost no chance of default. Also, note that the 5% (without COLA) cell requires a level annual TOTAL (EE+ER) contribution of 29.57% of pay to fully fund it over the 35-year career. It’s highly unlikely the employee would be contribution more than 20% of that total giving us a 20%/80% EE/ER split, nowhere near the 50%/50% you suggest.

      It would indeed be interesting to see what the employee’s actual share of Total Plan costs would be if we knew his ACTUAL year-by-year salary pattern, the actual $$ employee contribution in each year, and the actual Plan investment returns in each year. With that information we could calculate the employee’s ACTUAL total contribution (INCLUDING investment earning) to the date of retirement. But, to determine the employee’s SHARE of Total Plan costs, it would be a complete farce to do so by dividing the accumulated employee contributions (with interest) by the grossly understate “Initial Pension Reserve” figure of $487,000 that the NJ Plan evidently suggests. For a reasonable calculation, the employee’s accumulation should be divided by the $700,081 from immediateannuities.com or from some other figure (of similar magnitude) determined from use of an interest earnings assumption WELL BELOW the 10% rate associated with the $487,000 that NJ would use. With the ACTUAL employee contributions (with interest) divided by that much more appropriate (AND MUCH HIGHER) TOTAL Plan cost, the employee’s “share” would be much LOWER no matter what the actual employee contribution.

      In any event, we can reasonably estimate the EE/ER split simply by looking at my above table, choosing an “appropriate” interest rate (to determine the table ROW to pick from), picking the WITH or WITHOUT COLA table columns, and knowing what the level % of pay contribution the employee actually makes. Doing so suggests that even a very high employee contribution rate of 10% of pay would pay for AT MOST 1/3 of Total Plan costs (with a 15-20% “share” more likely) …. in THIS “low-formula” example. A more typical (higher factor) Plan formula would further reduce the employee’s share of total Plan costs (unless the employee’s own contribution rate were materially increased ).

      Reply

      • Posted by Tough Love on February 24, 2014 at 10:26 pm

        Ok, the table came out messed up ..

        I think you can see that there are 5 COLUMNS of %s or numbers. The following are the COLUMN headings from LEFT to RIGHT (with columns 2 and 3 from the left both being the WITHOUT COLA columns, and columns 4 and 5 from the left being the WITH COLA columns):

        (1) Interest Rate in All Years
        (2) Level Annual Total (EE + ER )% Contribution Required
        (3) Initial Reserve Fund Required
        (4) Level Annual Total (EE + ER )% Contribution Required
        (5) Initial Reserve Fund Required

        Reply

  9. The Initial Reserve is higher with a private annuity because the insurance companies are for-profit while a public sector plan is not for profit.

    The 1.67 percent factor is for 90 percent of all public employees in the state. This crowd belongs to the Teachers’ Pension and Annuity Fund or the Public Employees Retirement System.

    Reply

    • Posted by Tough Love on February 25, 2014 at 7:03 pm

      Joel, The expected profit portion of the $700,081 might be $50k-$75k … but nowhere near what would be necessary to bring it down to the $487,000 NJ uses.

      NJ, like all Public Sector Plan sponsors, does this for one reason … to artificially minimize the true cost of these promised pensions (and hide the much higher true cost from Taxpayers, who would them DEMAND change). And they know that when their investment gurus guess wrong that THEY aren’t on the hook for the loss, but the 3-rd party Taxpayers are, so they use a make-believe LOW figure that ignores the cost of the risk of investment loss.

      You’re a financial planner. Do you think the COST of that risk of loss is free? It’s very expensive, and most of the difference between the $700,081 that immediateannuities.com requires, and the $487,000 that NJ says is all that is needed to fully fund that promised pension, is the true cost of that “risk”.

      Suggesting that an appropriate measure of the workers TRUE “share” of total Plan cost is accurately calculated by dividing the worker’s own pension contributions (Including ACTUAL investment earnings) by the materially understated $487K cost that NJ suggests, is absurd.

      Reply

  10. And what about life expectancy of the average public employee compared to the general population. Could this be another reason for the difference in the Initial reserves needed to guarantee the $49,683 per year?

    Reply

    • Posted by Tough Love on February 25, 2014 at 7:51 pm

      The life expectancy of Public Sector workers is (on average) longer than the general population due to the better access to medical care (via their retiree healthcare benefits). That means that the payout period is LONGER for the Public Sector worker, requiring a LARGER, not smaller upfront reserve to pay that LONGER payout period.

      Reply

  11. Posted by Tough Love on February 25, 2014 at 11:10 pm

    Joel, I’m going to build an easily understood analogy…..

    Let’s say that as a perk to Public Sector workers, that the State agrees to buy each worker a car with the worker having to pay $10,000 towards the $20,000 price of the car, with the state being responsible for all necessary repairs.

    Lets also say that the car is so unreliable that all buyers of this car (the “State” in this example) elect to pay a one-time extra upfront “warranty/insurance” cost of $5,000 to cover all repair expenses associated with the high “risk” of expensive repairs.

    So what do we have…

    (A) Worker pays $10K (his portion of the car’s cost)
    (B) State pays $10K (The $20K cost of the car less the $10K offset from the worker)
    (C) State pays the warranty/insurance charge (a “risk” premium”) of $5K

    Would you consider the Employee’s “Share” of the “cost” of this employee perk, A/B (or 10K/20K=50%) or A/(B+C) (or 10K/(20K+$5K) = 40%) ?

    Now going back to our original discussion,…………

    A/B would be equivalent to calculating the workers “Share” of total pension costs, by dividing his actual contributions (accumulated with actual investment earnings to the date of retirement) by the state’s $487,000 figure (which internally assumes in it’s calculation, an investment return of near 10%, and includes no “risk premium” because a 3-rd party, the Taxpayers, is SEPARATELY on the hook to pony up MORE money should the negative risks of poor investment performance materialize), while

    A/(B+C) would be equivalent to calculating the workers “Share” of total pension costs, by dividing his actual contributions (accumulated with actual investment earnings to the date of retirement) by individualannuity.com’s figure of $700,081 (which internally assumes in it’s calculation an investment return of about 5%, because it DOES include the “risk premium” cost of poor performance because NOBODY will separately pony up any more money should the negative risks of poor investment performance materialize).

    As a professional Financial Planner, which do you believe is a proper measure of the Employee’s “share” of the total cost of this perk ?

    Reply

  12. A pension payout is supported by a constant flow of new money from employees and participating employers. With a private annuity there is no such support/backup. This is another reason for the larger initial reserve.

    Reply

    • Posted by Tough Love on February 26, 2014 at 10:05 pm

      Joel So, a “larger initial reserve” …. meaning A GREATER ACTUAL COST of the promised pension …. is now a function, NOT of the richness of the pension formula/provisions and developing investment and mortality experience, but of WHO pays for it ? Really, on what planet ?

      By saying that, you also seem to be supporting that often (Public Sector Union-supported) myth that continued contributions from current workers are NECESSARY for the continued financial well-being of the Plan.

      Perhaps you missed it, but I addressed that fallacy in my comment (above) responding to MACEO (and time-stamped February 20, 2014 at 3:46 pm) where he claimed that the need for such continued employee contributions made DB to DC Plan conversions not possible.

      I have pasted below the relevant portion of that earlier comment that explains why reasoning such as yours (that such employee contributions must continue) are simply wrong-headed thinking. Here it is………………
      —————————————————————-

      What the TAXPAYER’S owe towards already accrued pensions for PAST service has nothing to do with Plan changes for FUTURE Service and nothing stops the Taxpayers from continuing to amortize any unfunded liabilities for that PAST service, just as they would/should if the DB Plan was not frozen. And for the investment-savvy, the argument that a Plan Closing will shorten average working career durations necessitating the need to invest shorter-term (with lower expected returns) has been artfully challenged, there being no overriding need to change investment objectives and/or asset allocations.

      Arguments that DB Plans can’t be closed because the continued DB contributions of current workers are necessary imply either:

      (a) that the employee is contributing MORE in a given year than the value of that year’s accruals for that SAME worker and that the excess is available to fund current payment retires and to those soon to be retired, or
      (b) that it is OK and reasonable for the employee’s contributions, ALL of which are necessary toward the funding of THAT employee’s accruals, be instead used to pay the pensions of current retirees and those soon to be retired,

      Clearly BOTH (a) and (b) are false. (a) is false because the worker’s contributions RARELY pay for more than 10-20% of total Plan Costs (nowhere near the full cost of new annual pension accruals for that same employee) and no part of their annual contributions is “available” to fund the pensions of current retirees. (b) is false because diverting an employees own contributions (considerably inadequate in and of themselves to fund the annual incremental value of their own pension accruals) to fund current retiree pensions is effectively stealing from the “actives” to pay the “retireds”,leaving the actives in great jeopardy of significantly reduced pensions when they reach retirement. Doing such is the classic Ponzi-scheme.

      Reply

  13. You zero in on the on-going current employee contribution but omit that the employer also continues to contribute. These two guaranteed cash flows allows for a lower initial reserve in the public sector compared to a private sector purchase of an annuity where these two on-going contributions streams are not present.

    So there are two reasons for the vast difference in the required Initial Reserve: 1. the insurer’s profit and 2. the insurer’s lack of two on-going cash flows from the employee and ER.

    That said, I have a proxy for the compound annual return for the common stock portion of the NJ Pension Holdings. It is the S & P 500 Index. For the 35 years ended on December 31, 2013 the Index yielded a return of 11.85 percent. Assume, the bond portion did 7.0 percent. The ratio of stocks to bonds is 3/2 so the compounded annual return for the 35 year period is 10.23 percent.

    Assumptions: First year salary of $15,000 with a 3 percent annual raise and a 5 percent of salary annual contribution. Would you please do the calculation for us so we can see what the employee’s Annuity Savings balance is on December 31, 2013? Thank you, Joel

    Reply

  14. Posted by Tough Love on February 27, 2014 at 11:15 pm

    We were comparing how much money is needed (in hand on the retirement date) to have fully funded all future pension payments as they come due (in this one specific example that you outlined above) …in the form of assets IN HAND NOW, the date of retirement, for the worker’s PAST service 30-year pension accruals ….. with NJ saying $487,000 is enough to meet that obligation and with individualannuities,com saying $700,081 is the amount it would require to take on the obligation to make the identical payments.

    In the preceding comments I have identified why NJ’s figure is so much lower than immediateannuity.com’s figure… essentially because the NJ Retirement Plan ignores all downside investment risk (because, NOT the Pension Plan itself, but NJ’s Taxpayers having to pony up MORE should that downside risk materialize) by assuming an almost 10% return on invested assets. Obviously, immediateannuities.com must price it’s products (this specific annuity) in the REAL WORLD, where when you screw up, YOU have to make good, NOT some outside 3-rd party (like the Taxpayers).

    State Insurance Departments heavily regulate insurance and annuity companies that issue products in their States, and that regulation includes requiring that they hold reserves (to pay for the guarantees associated with their products) calculated on a reasonably conservative basis. with interest rates near the underlying rate that immediateannuities.com assumes in it’s pricing. Because of that, when it accepts money from a customer for a product (the single premium immediate life annuity in this case) it needs NO FURTHER MONEY to meet it’s obligations … so your point that ongoing funds are needed is simply WRONG.

    On the other hand, if NJ only starts with $487,000 of assets, it will indeed need a great deal more money to be able to pay the pension promised this worker … unless it gets REAL REAL lucky and earns that assumed 10% return for the next 23 years (the worker’s assumed life expectancy in our example). It can try to get that additional money from the Taxpayers directly (via tax increases), or as is routinely done ……. and as is suggested in YOUR 2 PRIOR comments …….by taking it from ongoing pension contributions from the employees and from the employer.

    But I have already addressed doing THAT in my immediately preceding comment to you ….. NONE of that money is available or appropriate for use to shore up underfunding or asset shortfalls of those already retired because doing so is effectively stealing from those still working.

    As to your OTHER points:

    Quoting… “So there are two reasons for the vast difference in the required Initial Reserve: 1. the insurer’s profit and 2. the insurer’s lack of two on-going cash flows from the employee and ER.”

    Profit incorporated into immediateannuities.com’s pricing would account for no more than 1/4 of the $487,000 to $700,081 differential. The big difference is the NJ Retirement Plan’s ignoring of the risk inherent in all equity (and some fixed income) investments, risk that they ignore because they improperly treat the Taxpayers as a separate backstop for this possibility. Your #2 is complete nonsense for the reasons enumerated very thoroughly above.

    Quoting … “That said, I have a proxy for the compound annual return for the common stock portion of the NJ Pension Holdings. It is the S & P 500 Index. For the 35 years ended on December 31, 2013 the Index yielded a return of 11.85 percent. Assume, the bond portion did 7.0 percent. The ratio of stocks to bonds is 3/2 so the compounded annual return for the 35 year period is 10.23 percent.”

    I would have though that you would have realized by now, not to try to BS or fool me ….. I find it quite disingenuous that you selectively picked a 35 year period 1/1/1979-12/31-2013 which BEGAN with the biggest bull market in American history. If instead, we went back further and selected the period from 1960, the earliest S&P figure I could readily find (http://stockcharts.com/freecharts/historical/spx1960.html) to 2013, the compound annual return over that 53 year period would be 6.57%, NOT your 11.85 …… and the stock/bond weighed average return would be FURTHER brought down by inclusion of the MUCH lower fixed income returns of the 1960s and all but the very late 1970s.

    And your requested calculation ……………

    With a 3% compound annual salary increase rate, the $15,000 year 1 salary would rise to $40,979 in the 35-th year. I believe this to be extremely unrealistic. A person starting with $15K 35 years ago would VERY likely be making quite a bit more than $41K today. Even if regular “merit” raises were only 3% annually (highly unlikely during the 1980s high inflation years) on average, most positions include one or more forms of step or longevity increases, and typically most workers get several promotions over their career.

    In any event, the mathematical summation of the 5%-of-pay employee contributions would be $35,682, and the accumulated sum of the employee’s contributions INCLUDING interest at 5%, 6%, 7%, 8%, 9%, and 10% would be $72,805, $85,357, $100,564, $119,924, $141,472, and $168,807 respectively,

    Reply

    • Here is the real world calculation of how much money the retiring employee of the TPAF-PERS of New Jersey contributed to his/her Initial Pension Reserve account. This is the actuarially calculated sum, established on the books of the TPAF-PERS System, needed at age 65 to guarantee the retiree his/her lifetime pension.

      Assumptions: employee is hired on January 1, 1978 and retires after 35 years of participation on December 31, 2013. The employee’s starting salary is $12,000 and grows at a rate of 5 percent. The employee contributes 5 percent of pay to his Annuity Savings Fund account. The employee’s last year salary is $63,040. The pension formula is .0167 x 35 X $60,000 (Final Average Salary) = a pension of $35,070.
      9.8 (pension reserve factor) X $35,070 = $343,686 = Initial Pension Reserve

      As I previously said the investment holdings earned an average annual compound return of 10.23 percent over the stated 35 years. This results in an individual Annuity Savings account balance for our retiring employee of $299,000. Required Initial Reserve of $343,686 less $299,000 = $44,686 = the amount the employer contributes. $44,686 divided by $343,686 = 13 percent.

      Let’s assume for the moment the 9.8 pension reserve factor is understated (for various self serving reasons) by 25 percent so a more realistic reserve factor would be 12.25. So we multiply 12.25 X $35,070 and we get an Initial Reserve of $430,000. Even with this larger Initial Reserve the retiring employee has contributed 69 percent of his/her initial Pension Reserve: $299,000 divided by $430,000.

      I trust this analysis will put to rest just how “greedy” the New Jersey public worker is. Please distribute this post to all fair minded people.

      Reply

      • Posted by Tough Love on February 28, 2014 at 8:11 pm

        Your example above was going along fine until I AGAIN saw that 9.8 factor that NJ’s Plans use to arrive at an absurdly LOW-BALL estimate of the TRUE cost of the promised 60% of final average pay pension..

        Use of that 9.8 multiplier was what generated (in our prior comments for a pension with different particulars) NJ’s figure of only $487,000 to fund that promised pension vs the $700,081 that immediateannuities.com requires to guarantee the IDENTICAL stream of payment to the retiree/annuitant…. and with no COLA increases, ever.

        NJ’s low-ball estimate is not the “Real world”, but the phoney world of Public Sector Unions and our Elected Officials working in collusion to appease the workers, enrich themselves (with similar excessive pensions, justified by low-balling the TRUE cost), and ensuring the elected official’s re-election via the garnering of generous Union campaign contributions and election support in return for their largess in granting these grossly excessive pensions.

        It seems that since you can’t factually win this argument, you believe that repeating prior mistakes and misleading assumptions will help your case. It doesn’t. Evidence your repeated call for use of this absurd 9.8 factor when it implies the need for balanced portfolio returns (for the entire retirement period ) of over 10% annually, and then trying to justify that by selectively picking a 35-year historical investment period (1979-2013) which coincides with the greatest bull-market in America’s history. The pertinent issue at hand is the TRUE cost of NJ’s pensions in general, including going forward for current and future workers, not the singular cost of one employee that started in 1979 at the beginning of a bull market.

        Conveniently, you ignored my pointing out that picking a longer (less-biased) period (going back to 1960, which averages in both periods of high and low returns) yields more appropriate expected average equity returns of 6.57% (vs the 11.85% from the 1979-2013 period from your earlier comment), which when averaged 2/3 bonds & 1/3 stocks (as you did in your earlier comment), and using a 6% average bond return instead of your 7% (to reflect the lower bond yields in the 1960s and all but the late 1970s) results in a long-term expected average portfolio yield of (2/3)(.0657) +(1/3)(.06) = 6.38%, NOT your 10.23%.

        So we have two biased elements of your subsequent calculation that suggest that the workers typically pay 87% (100% less than the 13% your assigned to the employer) of the total cost of their pensions:

        First, the use of 10.23% as a reasonable portfolio return rate assumption over the employee’s working years is absurdly high … in the extreme. Simply replacing your 10.23% with my 6.37% reduces the worker’s accumulated contributions from your $299K to $133K.

        Second, the 9.8 multiplier that NJ uses to determine the “Initial Pension Reserve” is absurdly LOW, and as I stated earlier, is based on the assumption of average investment earnings over the entire retirement period of approximately 10%. For the pension particulars in this example, the $35,070 non-COLA annual pension (which I will assume starts at age 60) is estimated by NJ’s Plans to have a cost (or “Initial Pension Reserve”) of 9.8 X $35,070 = $343,686. To guarantee the IDENTICAL stream of annual pension payments of $35,070 (i.e., via purchasing a single premium immediate annuity) would require (per Immediateannuities.com) a one time payment to the annuity-writer of $558,486 for a Male annuitant and $585,618 for a Female annuitant.

        Therefore (and choosing the Male annuitant), the PROPER calculation of the employee’s share of the TRUE total expected cost of a NJ pension (with the particulars of this example) is $133,000 / $558,486 = 23.8%, a FAR CRY from the 87% that you stated.

        And, with it now appearing likely that NJ’s COLAs will be reinstated via Court decision, we should calculate the employee’s share if they are. The $133,000 numerator of that rate does not change, but the denominator (the pension’s true expected cost) will increase by approximately 25% (to reflect the incremental value of annual COLA increases). So, with COLA reinstated, the employee’s expected share of total Plan costs decreases to $133,000 / (1.25 x $558,486) = 19.1% of total expected Plan costs

        Your comment (and the 13%) is NOT what the Taxpayers of NJ should expect their share of the TRUE cost of these extraordinarily generous pension to ultimately be.

        Reply

        • Fair and logically thinking people know you have a mean hearted agenda because you purposefully ignore the fact that I also used a Reserve Factor of 12.25 bringing the ER share of the initial reserve up to 31 percent.

          Now let’s use 17 as a Reserve Factor and see how much of the Initial Reserve is funded by the employER. $35,070 X 17 = Required Initial Reserve of $596,190. $596,190 less 299,000 = $297,190 = employer’s contribution toward the Required Initial Reserve.

          That said, the EE and the ER contributed equally to the Required Initial Reserve and to get to this 50/50 split we have to use 17 as a Reserve Factor which is greater than the 15.9 factor you quote from “immediateannuities.com.”
          =========================================================
          TL has accused me of picking January 1, 1978 thru December 31, 2013 because the investment markets were climbing in value. Please note that the S & P 500 Index returned about 1.0 percent for the 2000-2010 decade and this poor performance is factored into the overall 35 year return. Moreover, our hypothetical EE was hired at the age of 30 and planned to retire at age 65. Thus, we must use the investment return for that specific period to conduct an accurate analysis.

          TL REFUSES to use the S&P 500 index as a proxy for the return of the common stock portion of the TPAF- PERS investment holdings. Again: The SP 500 index returned 11.85 percent compounded annually for the 35 year period. This is published information and is irrefutable. I used 7 percent as the return for the bond portion of the investment holdings. 2/3 of the investment holdings have been invested in stocks and 1/3 have been invested in bonds. Here is how I arrived at 10.23 percent for the overall investment return: 11.85 + 11.85 + 7.0 = 30.7 divided by 3 = 10.23 percent.

          I trust all of you see that TL cannot accept the actual return of 10.23 percent because if he does he must agree to a $299,000 employee Annuity Savings account balance that is used as the retiree’s contribution to his/her Required Initial Reserve.

          Re: The Cola. The COLA kicks in after 24 months of retirement and is based on 60 percent of the rise in the Consumer Price Index. Thus, the $35,070 pension is guaranteed to lose 40 percent of its purchasing power.

          Reply

          • Posted by Tough Love on March 2, 2014 at 3:07 am

            Joelfrank, This comment calls for responding paragraph-by-paragraph.

            Quoting your paragraph #1 …”Fair and logically thinking people know you have a mean hearted agenda because you purposefully ignore the fact that I also used a Reserve Factor of 12.25 bringing the ER share of the initial reserve up to 31 percent. ”

            My response to your paragraph #1 … Of the 20+ comments we have traded, up until the last, you have not wavered from the NJ Plan’s 9.8 factor (associated with the absurd investment earnings assumption of roughly 10% for the entire retirement period of the worker). Due to my repeatedly stating that that is a garbage multiplier structured by NJ and it’s minions to intentionally minimize the TRUE cost of it pension promises, in you last comment you through me a bone, Specifically, you said…..

            “Let’s assume for the moment the 9.8 pension reserve factor is understated (for various self serving reasons) by 25 percent so a more realistic reserve factor would be 12.25. So we multiply 12.25 X $35,070 and we get an Initial Reserve of $430,000. Even with this larger Initial Reserve the retiring employee has contributed 69 percent of his/her initial Pension Reserve: $299,000 divided by $430,000.”

            First, keeping in mind the $558,486 Male annuitant figure immediateannuities.com say it requires to guarantee the IDENTICAL benefit stream, you randomly increase the absurdly low 9.8 factor by 25%. I’m sure you could have done the math to see that immediateannuity.co’s $558,486 would have necessitated increasing the 9.8 to 15.92…or by over 62%, NOT your randomly picked 25%.

            Second, your resultant 31% share of total Plan costs is useless for THAT reason alone, but ALSO because you AGAIN, in calculating that 31%, used $299,000 in the numerator (that being the 35-year accumulation of employee contribution with investment earnings), knowing that reaching $299,000 uses your grossly unrealistic portfolio rate of 10.23% for 35 years. Using my more reasonable 6.38% investment return (described in previous comments) more closely correlates to expected long term period returns with the period’s starting year NOT selectively picked to be the beginning of the biggest equity run-up in American history.

            And, my only “agenda” is to correct what I see as false/misleading statements and omissions and refute those who I believe contribute to the misinformation about the VERY high TRUE costs of Public Sector pensions. And I’ve got good company … from today’s news: http://uk.reuters.com/article/2014/03/01/buffett-letter-munis-idUKL1N0LY0BT20140301
            ——————————————————————–

            Quoting your paragraph #2&3 … “Now let’s use 17 as a Reserve Factor and see how much of the Initial Reserve is funded by the employER. $35,070 X 17 = Required Initial Reserve of $596,190. $596,190 less 299,000 = $297,190 = employer’s contribution toward the Required Initial Reserve. ” … “That said, the EE and the ER contributed equally to the Required Initial Reserve and to get to this 50/50 split we have to use 17 as a Reserve Factor which is greater than the 15.9 factor you quote from “immediateannuities.com.”

            My response to your paragraph #2&3… Much Better, but not quite right . While your new factor of 17 is consistent with immediateannuity.com’s initial pension reserve requirement (and as you said, overshoots it by a modest margin), if calculating (based on the particulars of the example we have been discussing) what should reasonably be expected as the EE share of Total Plan costs, the numerator should be the $133,000, NOT your $299,000 for the same reasons that I identified in responding to your Paragraph #1 above.

            A very reasonable expectation of the EE’s share of total Plan costs (with ZERO COLA increases) is $133,000/($558,486 for a Male annuitant and $585,618 for a Female annuitant.) = 23.8%% for a Male annuitant and 22.7% for a Female annuitant. And If NJ’s COLA increases are reinstated, those EE shares would DROP by 4-5 percentage points.
            ———————————————————————–

            Quoting your paragraph #4 ….. “TL has accused me of picking January 1, 1978 thru December 31, 2013 because the investment markets were climbing in value. Please note that the S & P 500 Index returned about 1.0 percent for the 2000-2010 decade and this poor performance is factored into the overall 35 year return. Moreover, our hypothetical EE was hired at the age of 30 and planned to retire at age 65. Thus, we must use the investment return for that specific period to conduct an accurate analysis.”

            My response to your paragraph #4 …… I said that the period from 1979 to 2013 started at the beginning of the biggest equity run-up in American history. In fact, EVEN with the lower returns of the 2000s the average return over the period from 1979 to 2013 is unrepresentative and far greater than what NJ Taxpayers should expect the contributions of current and future NJ Public Sector worker’s to earn to offset the TOTAL expected cost of their promised pensions. Joelfrank’s use of the 10.23% for the 1979-2013 period may be historically accurate over that PAST period, but should NOT reasonably be factored into discussions concerning the ongoing and expected Taxpayer funding requirements of NJ’s pensions. I venture to say that not 1 in 10 (and likely FAR lower) professional money manages would assume a 10.23% return averaged over 35 years.
            ——————————————————————————–
            Quoting your paragraph #5 ….. “TL REFUSES to use the S&P 500 index as a proxy for the return of the common stock portion of the TPAF- PERS investment holdings. Again: The SP 500 index returned 11.85 percent compounded annually for the 35 year period. This is published information and is irrefutable. I used 7 percent as the return for the bond portion of the investment holdings. 2/3 of the investment holdings have been invested in stocks and 1/3 have been invested in bonds. Here is how I arrived at 10.23 percent for the overall investment return: 11.85 + 11.85 + 7.0 = 30.7 divided by 3 = 10.23 percent.”

            My response to your paragraph #5 …… If you recall, above I said …”my only “agenda” is to correct what I see as false/misleading statements and omissions and refute those who I believe contribute to the misinformation about the VERY high TRUE costs of Public Sector pensions.”

            You seem to feel that it’s OK for a specific PAST period of exceptional investment returns (10.23%) to be used in the calculation of the Employee’s share of total Plan costs and in discussions of the employee’s share of Total Plan costs…… without strong and appropriate qualifications that is it HIGHLY unlikely that those results (the 10.23% portfolio return, and the lower EE share resulting from such high returns) can be expected of current and future employee contributions. I don’t, and my response to that is to show what long-term average returns are more likely to be by using a longer period (from 1960-2013) which includes a period of very modest returns in the earlier years, yielding an estimated portfolio return of 6.38 % vs your 10.23%.

            The upshot is that while an employee hired in 1979 and retiring in 2013 who contributed $39,863 out-of-pocket over the 35 years, might have seen that grow at 10.23% annually to $299K at the end of the 35-th year, for the purpose of Public Sector pension cost discussions, it is FAR more reasonable to “expect” the accumulated sum to be about $133K via average annual portfolio investment earnings of 6.38%.
            —————————————————————————–
            Quoting your paragraph #6 ….. “I trust all of you see that TL cannot accept the actual return of 10.23 percent because if he does he must agree to a $299,000 employee Annuity Savings account balance that is used as the retiree’s contribution to his/her Required Initial Reserve.”

            My response to your paragraph #6 …… Other than as an interesting HISTORICAL note, I cannot accept it as even remotely reasonable or appropriate in any current day discussion of the split of Total Public Sector pension costs between the EE and the ER…. because it results from investment returns over THAT select period that have an EXTREMELY low probability of being repeated over any other 35 year period.
            —————————————————————————
            Quoting your paragraph #7 ….. “Re: The Cola. The COLA kicks in after 24 months of retirement and is based on 60 percent of the rise in the Consumer Price Index. Thus, the $35,070 pension is guaranteed to lose 40 percent of its purchasing power.”

            My response to your paragraph #7 ……How does such “thinking” jibe with the fact that near ZERO percent of PRIVATE Sector Corporate-sponsored DB pension include ANY COLA increases ? Is the glass half full or half empty? It always seems that the PUBLIC Sector employees’ glass is filled with perks that PRIVATE Sector Taxpayers, who pay for (YES) 80% of it, don’t get. The inclusion of COLA is a VERY VERY VERY expensive add-on that is included in almost ALL Public Sector Plans, but almost no Private Sector Plans.

            And, the 4-5 percentage point REDUCTION in the APPROPRIATELY calculated EE’s share of 23.8%% for a Male annuitant and 22.7% for a Female annuitant (discussed at the end on my response to your Paragraph #s2&3 above), was calculated assuming only a 2% annual COLA increase. That 2% is historically consistent with roughly 60% of the actual long-term inflation rate.

          • Posted by Tough Love on March 2, 2014 at 3:24 am

            Correction …….. The word “lower”, within the parenthesis in the middle of the 2-nd paragraph of MY response to joelfrank’s Paragraph # 5 should be “higher”.

          • Of Note: Should death occur prior to retirement the Annuity Savings account balance is payable to the designated beneficiary and includes a statutory interest rate of 4 percent.

            In my example, should death occur a month prior to retirement the employee’s Annuity Savings balance is $99,000 and this is the IN-SERVICE DEATH BENEFIT, not the real balance of $299,000. This shows just how “greedy” the public-sector crowd is.

          • Posted by Tough Love on March 2, 2014 at 4:54 pm

            Joelfrank, Not that I disagree that it is reasonable to return the worker’s contributions with actual investment earnings, but of note is that the worker’s contributions are not really unqualified Plan contributions, but pension contributions “contingent” upon the survival of the worker until retirement.

            And if it’s appropriate to return contributions with actual POSITIVE investment returns, then shouldn’t that include the possibility of overall NEGATIVE returns? While that is unlikely over a long period of time, a non-vested terminator with say 4 years of service might certainly be in a negative return position. See how well that goes over with the Unions?

            And while certainly their Unions, and many of the workers themselves are indeed greedy, the PRIMARY blame for the financial mess we are in lies NOT with the workers, but with our Union campaign-contribution-bought-off elected officials who, if not for their own self-interest, would never have granted these grossly excessive pension promises in the first place. But with the WORKERS being the financial BENEFICIARIES of these grossly excessive promises, THAT’s where Private Sector Taxpayers need to look to remedy this decades-long financial “mugging” perpetrated upon them …. by very material reductions (of AT LEAST 50%) in the pension accrual rate fot the FUTURE service of all CURRENT workers.

  15. The framers in 1919 and 1921, of the two pension systems, knew that the bi-weekly contribution of the employee along with the investment returns on those contributions would provide a substantial contribution toward the needed Initial Pension Reserve.

    Reply

    • Posted by Tough Love on February 28, 2014 at 9:48 pm

      Well, I have no idea what someone “knew” almost 100 years ago.

      What I see, is that Private Sector Taxpayers HAVE BEEN, ARE NOW, and WILL CONTINUE TO BE financially “mugged” by the Public Sector Union/Politician cabal via the (self-interested) granting of these grossly excessive pensions granted all Public Sector workers, and with rarely less than 80% of Total Plan costs paid for, by NOT the workers, but by the Taxpayers, and with Taxpayer-funding demands 3-8 times greater than what those same Private Sector Taxpayers typically get in retirement contributions from THEIR employers ……..unless Private Sector Taxpayers rightfully rise up and demand MATERIAL change (50+% reductions in the pension accrual rate). And to have ANY near-term impact, that change MUST include material pension reductions for the FUTURE Service of all CURRENT (not just new) workers.

      Reply

  16. Stock Market Performance Over The Long Term
    see: http://www.moneychimp.com/features/market_cagr.htm

    1926 to the present is the most commonly used period for measuring the long-term performance of the stock market. From January 1, 1926 thru December 31, 2013 the S&P 500 Index grew at an annualized rate of 10.10 percent.

    Reply

    • Posted by Tough Love on March 2, 2014 at 4:55 pm

      Quoting …”1926 to the present is the most commonly used period for measuring the long-term performance of the stock market.”

      Who said so …you ?

      Reply

      • Quoting …”1926 to the present is the most commonly used period for measuring the long-term performance of the stock market.”

        Who said so …you ?
        ==================================================================
        Yes and a few banks, brokerages, insurance companies, researchers, pension funds, endowment funds, TIAA-CREF, Fidelity Funds, The Vanguard Group, the Federal Thrift Savings Plan–just to name a few. Check with them to see if they agree with me. If they do not I will gladly retract my assertion. We await your kind and gracious reply.

        Reply

        • Posted by Tough Love on March 2, 2014 at 9:19 pm

          Prove it (your words quoted above) via links … talk & BS is cheap.

          Reply

        • Posted by Tough Love on March 2, 2014 at 10:21 pm

          While I await for you you prove it via links, there is a wrong message I believe that you are (via this discussion of NJ’s Plans) leading the readers to believe, and that is that they can simply look to an EXPECTED return (be it your 10.23% or my 6.38%) and run with it …. with no discussion of investment risk.

          That CERTAINLY isn’t true when an individual is investing their own money and I’d wager that risk is (or at least should be) a very important part of your discussions with individual clients.

          The ONLY reason that investment risk is to a very large extent ignored (or at least given FAR less attention than it deserves) is that the structure underlying the funding of NJ’s DB Pension Plans shifts that downside investment risk OUTSIDE the Plans by assuming that should that downside risk materialize, it will be separately paid for, NOT via Plan current Plan assets, but via a demand for more money from the Taxpayers.

          The TRUE total expected Plan costs to NJ Taxpayers INCLUDES THAT RISK whether it is indirectly incorporated into the Plan’s investment assumptions via use of reasonably conservative investment return assumptions (close to my 6.38%), or via higher investment return assumptions (but hopefully not as high for future years as your ridiculous 10.23%) w/o the risk cost, but then ADDING that risk cost BACK IN on top of the Plan’s cost so calculated. To not do so is ignoring reality and simply more hoodwinking of NJ’s Taxpayers.

          Reply

  17. Here is the definitive study and annual report:

    http://corporate.morningstar.com/ib/asp/subject.aspx?

    Reply

    • Posted by Tough Love on March 2, 2014 at 9:20 pm

      Here’s what you get when you click that link …. “We’re sorry. The resource you are looking for could not be located. Please check the URL and try again.”

      Reply

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