Employees Paying For Their Own Pensions In New Jersey?

Alicia H. Munnell, director of the Center for Retirement Research at Boston College, in a WSJ blog believes that benefit cuts for New Jersey retirees should not be considered  in part because “New Jersey benefits for current employees are now significantly below the national average and employees pay most of the costs.”

This statement strikes one as odd since the latest valuation reports show employee contributions at $1.93 billion while government contributions are at $2.98 billion but Ms. Munnell is obviously referring to the annual accrual of benefits known as the Normal Cost which, according to the July 1, 2013 actuarial reports, does show employee contributions covering 65% of that Normal Cost for the five largest plans ($1,874,252,148 out of $2,897,259,254 in this spreadsheet).  But there is a reason for that.

Public plan actuarial reports are not designed to value benefits honestly but rather to use whatever gimmicks won’t get you kicked out of the AAA (and some that should) to get the contribution amounts the people who hired you want (ideally $0).

If the idea was to fund these plans properly then a funding method that pays the cost of benefits accruing annually plus a piece amortizing any underfunding should logically reduce unfunded liabilities which is not what has been going on even with sensational hedge-fund-fueled earnings growth over the last few years.   The unfunded liabilities for the New Jersey plans, even after the elimination of COLAs for the nonce, have officially risen to $52 billion.

New Jersey employees are not picking up most of the cost of their pension benefits.  They are picking up most of the costs of benefits valued using dodgy assumptions and none of the costs of the massive ($157 billion?) unfunded liability that has resulted from this perversion of actuarial principles.

26 responses to this post.

  1. Posted by Tough Love on April 19, 2014 at 1:20 am

    My opinion of author Alicia H. Munnell has dropped considerably after reading her linked article, notwithstanding her impressive credentials.

    The following are my thoughts on that article ……….

    (1) Since Ms. Munnell is quoting an unfunded liability of $56 Billion, she is clearly using NJ’s “official” Plan figures and assumptions because under more appropriate assumptions (such as those now used by Moody in it’s analysis of creditworthiness) NJ’s unfunded liability is 2-3 times that figure. Her use of NJ’s “official” #s, and particularly, the assumptions that underlie them, as problematic, will be apparent later

    (2) In her 4-th paragraph she describes the 2010 pension changes applicable to NEW employees and then says …

    “Once new hires replace current employees, the annual pension cost for general employees will be about 9% of payroll, with the employee contributing 7.5%. The cost for teachers will be about 10% with an employee contribution of 7.5%. For police and fire, the cost will be about 20% with an employee contribution of 10%. These provisions mean that, based on the system’s assumed investment return, most employees will pay for the bulk of their pension benefits.”

    In the last sentence above, she appears to be arriving at that conclusion based on the formulas applicable to these “NEW” employees ignoring the fact that the savings will not materialize for many many years and those employed before the 2010 pension changes (many of whom will be working for 20-30 MORE years) remain under the old (higher) pension formula and provisions. Neglecting to point that out is far more than a minor omission for an academic. I would expect such from the Public Sector Unions, but not from an unbiased academic … so might she be biased?

    Next….. in my initial reading of the quoted paragraph above, I thought the 9% and 7.5% for general employees were additive to get Total Level Annual Plan cost (as a % of pay). but based on the last sentence in that paragraph, particularly the words …”most employees will pay for the bulk of their pension benefits.”, I now believe she was saying that for General employees the TOTAL Level Annual Plan cost is 9% and the (NEW) employees will be paying 7.5% of that 9%. Similarly, for teachers and Police/Fire, she seems to be saying that for the NEW employees the TOTAL Level Annual Plan costs will be 10% and 20% respectively.

    To put it mildly (as someone who understands the math behind pension funding very well .. although I do not pension valuations for a living) there is not a snowball’s chance in hell that even for new workers (with the reduced formulas and provisions) that the promised benefits can be fully funded over their working careers with such low total contributions under ANY reasonable set of assumptions. Doubling the 9%, 10% and 20% figures MIGHT be reasonable and then only if the COLAs are not reinstated.

    (3) Ms. Munnell goes on to correctly identify the main reason for the significant unfunded liability (little funding), but interestingly never mentions the retroactive pension increases granted in 2001 (yr ?) ……again, might she be biased ?

    (4) In her next-to-last paragraph, she says …

    “The option remains to cut future benefits for current workers. Such cuts also face legal hurdles, although Ohio and Rhode Island have overcome such hurdles. The argument against such a change is that New Jersey benefits for current employees are now significantly below the national average and employees pay most of the costs.

    That last sentence incrementally supports a claim that she is indeed biased ….

    First, she argues against cutting future benefits for current workers, by AGAIN stating that “employees pay most of the costs”. but that earlier conclusion (which I assert is erroneous) arose from analysis of the reduced formulas and provisions of the NEW (post 2010 pension reduction legislation) workers, but here she is using the same argument to justify not reducing FUTURE service pension accruals for the OLDER (Per-2010 legislation) CURRENT workers. She presented no justification for applying that argument to the higher pensions of the pre-2010 employees

    Second ,,…. she argues against cutting future benefits for current workers by saying that “New Jersey benefits for current employees are now significantly below the national average “. While a few States (e.g.,CA, NV) clearly provide greater pensions than NJ, of the MANY studies I have seen, I can recall not one that shows NJ Plan generosity to be “significantly below the national average”. Near the average, yes. Below the exact average, I don’t know. Significantly below the average, definitely not.
    While to be fair, her article is a “blog” article, not one written for a scholarly journal, but it would have been wise to include linked sources when making such bold claims. Without such proof, I do not believe that statement to be accurate.

    In any event …. again considering possibility of her being biased …. is the proper group against which the generosity of NJ’s Public Sector pensions should be measured, ONLY the pensions of other PUBLIC Sector workers? With Private Sector Taxpayer’s being “responsible” (even if foolishly deferring a significant share of their contributions to later years) for certainly well more than half of total Plan costs (notwithstanding Ms. Munnell’s claim to the contrary) I believe that it is far more appropriate to measure the generosity of NJ’s Pension Plans against the generosity of the pension Plans typically granted NJ ‘s PRIVATE Sector workers by their employers. Why does she not (even briefly) mention this ?

    EVERY such comparison (using reasonable and appropriate assumptions) would show that the value at retirement of NJ’s PUBLIC Sector pension Plans are ALWAYS multiples greater than those of similarly situated (in pay, service years, and age at retirement) Private Sector workers.


    • Posted by Anonymous on May 27, 2014 at 8:39 am

      Have there been any published studies of the valuation results under EAN for New Jersey? NJ hasn’t had freedom of information requests to build the census data files like some other states, have they?


  2. Posted by Pat on April 19, 2014 at 11:18 am

    TL- You must have spent some time on that reply. Some thoughts-

    First, I hope you have the courage to cut and paste your reply directly into Ms. Munnels blog. You are very good a preaching to the choir, or facing up to the “best and brightest” public employees. Maybe you should give your opinion to someone qualified to give an educated rebuttal.

    Second, I am very curious about Ms. Munnels premise. I am not an actuary or accountant, which is why I follow Johns blog. But if its true, if the state has nearly shifted all the costs onto the employees, and the employees agree to this (it would be the price of keeping a DB system), what is the problem? Of course, it will take 30 years to wash out all the old system employees.

    Third, I do agree that blogs are opinion pieces and that bias must be assumed. I also feel that adding links for background information strengthens any article or posting. This is especially true in this case, since we all know what a union-controlled bastion of liberal thought the WSJ is. You might want to take your own advice and add links to strengthen your arguments.


    • Posted by Tough Love on April 19, 2014 at 2:37 pm

      I wish I could… as I would LOVE to here her response, but as that site requires a password log-in i was not able to do so…. I tried. I choose to comment anonymously due to some aggressive/threatening responses from some public sector workers,. one of whom threatened to drag me to my bank by my “cahonas” to withdraw money to fund his pension. Fat chance . Fell free to do so on my behalf.

      Employees will likely pay about 1/4 of Total Plan cost …. using appropriate (Moody’s) assumptions and funding it over the employees working career (as i should be). I won’t call Ms. Munnell an idiot, but her conclusion is wrong and idiotic.

      Quoting … “Of course, it will take 30 years to wash out all the old system employees. ”
      Yes, and likely $150-$200 Billion that the Taxpayers shouldn’t (and won’t) be giving you to firm up your grossly excessive, unnecessary, and unjust (to taxpayers) pensions.


      • Posted by Pat on April 19, 2014 at 3:25 pm

        I expected that you would say that. It is easy to hide behind a pseudonym, and i will give credit to those who reveal their names in Ms. Munnell’s blog.

        But i do understand about confidentiality. If I can make another suggestion- send her an email directly. You will have a better chance at a reply, and you can post the email and reply here without revealing your name. I will trust you would do so without editing out any content.


        • Posted by Tough Love on April 19, 2014 at 3:51 pm

          Well, it’s a long established Democratic principle to be able to advocate your opinions anonymously. It’s NOT to hide, but to avoid being abused from those with differing opinions.

          I wouldn’t want to worry (no matter how small the likelihood) that a mentally-imbalanced retired (or perhaps active) officer might show up at my door (gun in hand) because I strongly advocate for a reduction in what I see as a grossly excessive pension (and granted ONLY as a result of collusion between his Union and the Politicians bought-off with Union campaign contributions and election support).

          If you find it so objectionable to comment anonymously (or via a monicker, as you do …”Pat”). please disclose to the readers you full name, address and phone number.

          Sorry, If I send her an e-mail, she will have my e-mail address …. anonymous means anonymous ….. which is why I have never e-mailed Mr. Bury. I’m sure he and I could have many interesting one-on-one conversations.

          You have my permission to post my comment on the Ms Munnell’s blog article and attribute it to commentator “Tough Love” (and stating why I did not post it directly). I really WOULD like to read her response. Better yet, I wish the log-in requirement were removed so that she and I could debate the issue ….as I would have no easy way to respond to her response.


          • Posted by Pat on April 19, 2014 at 4:28 pm

            Jeeze- you really are chicken sh*t. Maybe you should advocate for gun control. I disagree with much of what you have to say, but this issue is not black and white and I try to listen to all opinions, and you do have some valid points. BTW, my name is Pat(rick) Bost, and I am a public employee nearing the end of my career and very concerned about this issue. I give my union rep as hard a time as i give you, so please think a bit before flaming me!


          • Posted by Tough Love on April 19, 2014 at 6:46 pm

            No Pat, I really wouldn’t expect anyone to show up at my door, but it wouldn’t surprise me at all to suddenly start getting a slew of traffic summonses for the most minor (or made-up) of offenses.

            So you call me a ” chicken sh*t”. Does that make you fair game for me to call you a Public Sector pig with a grossly exaggerated sense of entitlement ?

            So tell me Mr. Bost, with your Public Sector cash pay likely no less than what you would have earned in a comparable Private Sector job (and if not directly comparable, a job with similar risks, experience and education requirements, and skill sets), what justifies your taxpayer-funded Public pension, always AT LEAST 2x times greater in value at retirement (considering BOTH the richer “formula” AND the much more generous “provisions) than that of the comparable (in pay, service years, and age at retirement) Private Sector worker, MOST OFTEN 3x-4x greater, and for safety workers, USUALLY 4x-6x greater ?

            Because you were “promised” doesn’t cut it. Private Sector workers have already lost much of what they too were promised, and while this is not a “race-to-the-bottom” there is simply ZERO justification for you to earn equal cash pay but get MUCH MUCH greater Taxpayer-funded pension & benefits.

            And speaking of “benefits”, what percentage pre-age-65 PRIVATE Sector retirees do you think receive a material Employer subsidy towards retiree healthcare …. vs the almost Universal coverage for Public Sector workers … on the Taxpayers’ dime ?


  3. Posted by skip3house on April 19, 2014 at 11:26 am

    KISS. All to 401(K) type, even current NJ workers/retirees. All DB to DC.


    • Posted by skip3house on April 19, 2014 at 3:13 pm

      Mine above, plus a reasoned distribution of present pension funds. This is the entirety of what I picked up in these blogs, along with I&R, end gerrymandering, and eliminate property tax. Why kill us with details?
      DB is Defined Benefits, DC Defined Contributions….for new readers.


    • Posted by Anonymous on May 27, 2014 at 8:47 am

      Watch the next twenty years as the 401k era comes home to retire.


  4. Posted by Javagold on April 19, 2014 at 1:17 pm

    Go to Atlantic City. Put it all black. Win and pension is covered. Lose and Atlantic City is saved. Problem solved.

    Otherwise let it collapse , I ain’t paying for public takers to retire. They can TRY and save like everyone else.


    • Posted by skip3house on April 19, 2014 at 3:16 pm

      As practical a solution as here,, Javagold


    • Posted by truthnolie on April 21, 2014 at 12:32 am

      “I ain’t paying for public takers to retire”

      Ummm….hate to break it to you but you have paid, are currently paying and will continue to pay…..Nice “I’m as mad as hell” type attitude you got there but just like all your jealous & envious buddies your delusional protestations will amount to nothing so….just shut up and pay up.


      • Posted by truthnolie on April 21, 2014 at 12:38 am

        Oh….I forgot to ask how you plan on NOT paying???….Please enlighten us on how you will refuse to pay……tick, tock, tick, tock…..yeah….I thought so.

        I’ve got an idea….why don’t you and the other 4 or 5 idiots who post ,repost, re-repost (and re-re-repost, etc., etc.) the same old tired “we’re not gonna take it” crap (I’m looking at you TL) get together and “storm” the statehouse. That would look mighty impressive in the media…..by “impressive” I mean “pathetic”.


        • Posted by Tough Love on April 21, 2014 at 2:55 am

          On a rant again? Sounds like you’re getting concerned…. and rightfully so.

          Let’s see …. Christie is trying to figure out just how to tell NJ’s Unions/workers that their Plans are “dead meat” …….. as Mr. Bury has been trying to get into your thick skull by telling you that the real funding ratio for Nj’s plans is about 35% … WAY past the point of no return.

          keep laughing,…………. crying.won’t help.

          And PS, It’s the politicians who will change sides and turn on you. The Taxpayers won’t have to pay excessive Taxes because they’ll never be asked to do so.


          • Posted by truthnolie on April 21, 2014 at 11:39 am

            Tick, tock, tick, tock, tick, tock…………


          • Posted by FormerJerseyan on April 21, 2014 at 2:37 pm

            I disagree, TL, insofar as the already-too-high NJ property taxes are what led me to make like George Washington and cross the Delaware.

            But, if your point is that NJ municipalities will get to the point where they can no longer afford even basic services such as current teacher/police salaraies, then I agree that when this point is reached, the politicians will switch sides.

            If it means amending the NJ constitution to reneg on taker benefits, including COLA adjustments, early retirement healthcare, and even basic pension payments, then I totally agree this day will come for NJ as it will come in most other places.

            NJ is too far down the road and is never going to “grow” its way out of the problem (except to the extent the FED completely inflates the currency). If Janet Yellen has her way, the COLA freeze alone will do the trick so far as NJ’s problems are concerned. Of course, then we will all have bigger fish to fry than paying our taxes (like not starving to death).

            If the situation with property taxes in NJ comes to head before a hyperinflation crisis a-la post WWI Austria, Hungary and Germany, then I would look to an NJ constitution amending ballot question authorizing the State to amend the taker benefits both prospectively and retroactively or to set a constitutional balance in dollars spent between current services and retiree benefit provisions + an absolute cap on property taxes as a percentage of property value.

            Either way, the power remains with the people to undo what the politicians have done, as well as for the politicians to undue what the politicians have done. I left NJ because I expect the foot-dragging to continue until the very last possible moment. Now, I put an extra 10K into my own retirement plan rather than towards high NJ property taxes!


            • “….If the situation with property taxes in NJ comes to head….”
              Simple. Eliminate tha regressive and cruel property tax. Replcae it with a reformed, progressive NJ Income tax distributed by population and students.
              Might even cause towns to combine and eliminate Counties (along with the immense Assessment bureaucracy).


  5. Posted by FormerJerseyan on April 21, 2014 at 5:50 pm

    Yeah, well, a “progressive” income tax would be even worse. PA has a 3.07 percent income tax – flat. It is the second of 3 reasons I moved here (outrageous property taxes in NJ were the first and progressive-controlled governance rounding out the three) .

    And if they change the PA system to make it “progressive”, I will just move again.

    The burden of federal income taxes already falls on the top 1-2 percent of wage earners. Funny how you don’t say anything about cuts! I say privatize education and watch how fast the problems sort themselves out


  6. Please do arithmetic of tripling friends NJ Income tax, and eliminating their property tax. All I did were better off with no property tax.
    Wealthy (way over half million to sky) want your thinking. They have so much left after necessary, it does not matter the cost of gasoline, property tax, income tax,….like in 1950s.


    • Alas, i am an engineer and an attorney and good enough at math to know your reasoning and your premise are flawed – already the labor participation rate is flawed so the taxes of which you speak would be borne by a shrinking part of NJ’s population. Wealth will go where it is treated best, as it has always. Your dreams of a progressive utopia funded by “other people’s money” is destined to fail (watch Illinois and CA)


      • Posted by Tough Love on April 22, 2014 at 11:24 am

        I agree … as do I with the your response to my earlier comment above THAT was exactly where I was going).

        And of course I have no illusions that my current high property taxes will come “down”. I just don’t want them to (and certainly don’t believe they should) rise simply so that our Public Sector workers’ grossly excessive pension & benefit promises (granted only via the collusion between their Unions and our elected officials) can be met.


      • FormerJ, You left for PA. What worse can happen to NJ ? Nicest Carpet Baggers in NJ are from PA, so when PA and rest become Progressive, welcome back !


      • Posted by skip3house on October 28, 2014 at 12:55 pm

        Likely, you are right, but sure can wish for a more inclusive system


  7. Thanks for sharing, this is a fantastic blog article.


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