Insanity of New Jersey Sponsoring a Defined Benefit Plan

New Jersey will shortly announce that it will be moving away from a Defined Benefit pension system arguing….

It is not the system that is insane (note the 401(k) experiment in the private sector) but rather having governments with no funding discipline (external or internal) sponsoring these plans. This becomes obvious when Governor Christie claims that a $681 million annual contribution “pays our bills, the costs we are incurring today, for all active employees who are contributing to the pension system.”


But go to the 7/1/13 valuation data and check out what those costs per participant, after years of gimmicks and manipulations to keep contributions down, wind up being:

  • $1,653 (2.82% of pay) for a participant in the Public Employee Retirement System
  • $2,735 (3.78% of pay) for a participant in the Teachers’ Plan
  • $2,927 (4.31% of pay) for all participants the state is contributing for

Those amounts are what many 401(k) sponsors provide to their employees as a match in the private sector. They are inconsistent with the true cost of a Defined Benefit Plan which is the main reason New Jersey will shortly default further on pensions it promised to hundreds of thousands of people.  It is not the defined benefit system that failed these people but rather:

  • politicians over-promising and under-paying
  • regulators missing
  • actuaries complying
  • participants believing


54 responses to this post.

  1. Posted by FormerJerseyan on May 27, 2014 at 2:15 pm

    I agree that the over-promising part has failed “these people” if you are referring to the tax payers of today. However, with respect to the plan participants, the failure has yet to be seen but seems, at this point, inevitable.

    Pointing fingers at this juncture seems to have no point whatsoever. Presumably, had the state “underpromised”, the under paying would not have the impact it has. Also, the notion that trees grow to the sky (i.e. that demographic trends will always be favorable and incomes will always rise) is not at all mentioned in your diatribe, unless of course this is where the “actuaries complying” comes in?


  2. Posted by Anonymous on May 27, 2014 at 2:20 pm

    I don’t understand. This is the 7/1/2013 valuation data. These are the normal costs calculated as of 7/1/2013. They are payable per New Jersey’s funding policy in FY 2015. And the valuation reports say in the footnotes that the amounts will need to be adjusted with interest if contribution not made 7/1/2014. So why is there only one year of interest?

    John, are you aware of when the payments have been made historically? I’m assuming right at the end of the fiscal year, but I’m not seeing the dates anywhere.

    And have you looked at the amounts necessary for the contributions to be to avoid negative amortization?>


    • Posted by Anonymous on May 27, 2014 at 2:22 pm

      On the timing, since the FY2014 contribution was included as a contribution receivable in the 2013 valuation, will the recommended FY2015 contribution be recalculated with this new level?


    • For localities (based on a review of Union County check registries) it looks like they make payments monthly with one big one in mid-April though those monthly payments might be employee contributions so it’s likely everyone is on the same schedule with one payout a year.

      They put this 2-year system in (i.e. the 7/1/13 valuation determinations what the payment due June, 2015 would be) for budgeting purposes so everyone knows what their pension number will be when they make up that year’s budget.

      It is level dollar in the Teachers valuation:
      so theoretically there would be no negative amortization but then you have that 3/7th, 4/7th (and now 0/7th) factor there is.


  3. Posted by JM on May 27, 2014 at 2:28 pm

    I am currently retired and age 65 I cannot collect SS (as I was a Police Officer my entire working life) and my municipality has me go on medicare as my primary insurance. I am very grateful that my City has not reneged on their promise of healthcare as my former health insurance is now my secondary payer and my wife who is under 65 is still insured. My pension is modest under 50K not like the pensions of today. I lost my COLA completely where a Police Officer or Firefighter in Detroit which is going bankrupt kept his or her entire pension and COLA is limited to 1% a year, that’s better than I made out under Krispy Kremes pension reform that “fixed” the system . Am I worried about the talk of reducing my pension of course I am. I also worry about the effects on my widow when I pass it actually keeps me awake at night. Sorry about the rant but my point is and advice to all current and future state and local employees is to NEVER EVER trust any plan Defined Benefits or Contributions that the State has access to the funds they will find a way to steal them, they can’t help themselves seeing a pot of money that large is too much for any politician.


    • Posted by FormerJerseyan on May 27, 2014 at 3:44 pm

      On a positive note, JM, at least you WERE able to retire before age 65. Your pension and health care eligibility are benefits that your average every day taxpayer (you know, the little people who actually pay your pension and health care benefits though ridiculous out of control property taxes) will never see. A few years from now, Social Security will be means tested and your “measly” under 50K pension will look quite rich by comparison.

      By the way, as I am sure you are aware, members of the military, like police, get shot at (probably more often in a one year t.o.d. then most cops see in a lifetime). However, unlike police, when the tour is over, they get nothing (unless you think VA benefits are worth special mention). As a volunteer firefighter I was happy enough to give back to the community and did not need the promise of overly generous benefits to get me out of bed at 2:00 in the morning. But I guess for some jobs, only the promise of health care for life and a retirement with a value of $5M or more (at today’s interest rates) is enough to find candidates (this is a dubious proposition, to me at least).

      I do happen to believe, for what its worth, that police should get a pension and a good one. Where I differ is when they should get to collect it. If you retire at age 45, then you should get another job and work at that til you are 67 like the rest of us. They should also tax the net present value of those benefits since so many of your cohorts leave rather than try to survive in the mess their bosses and patrons left. As for the health care benefits, these should be the same as the taxpayers get. The sooner those changes are made the better for NJ but I am guessing they will wait until there is a zero balance in the plan account. Then? I am sure there will be enough misery to go around. You seem to be one of the lucky ones who made it to the finish line. Congratulations – perhaps the money will last or you have your own investments on the side.

      Since you brought up Detroit, I submit that whatever they do there it will only be a half-a$$ed temporary measure – it will not save their pension plans, any more than NJ’s plan can be saved. Real estate values here, as they did in Detroit years ago, have now hit the high water mark (from which the property taxes are collected) and now, they shall spiral downward based on the need to meet ever increasing promises to folks like you.

      The fact is that any approach taken by “Crispycreme” (as the publix like you prefer to disparagingly call him) would be a failure. He has no winning hand to play and he is playing a zero sum game – all winnings come at someone else’s expense.

      The best Christie can hope to do is piss off the smallest possible number of people in this state who matter to its continued viability and vitality. I am not referring to the so-called public servants but, rather, to the people who work in the private sector. These are the ones who generate the wealth that is used to pay the public servants’ salaries, their benefits, and to support Ms. Oliver’s “most vulnerablest” among us. This group is going to get as small as it did for Detroit before things are finished.

      Christie is trying to force a fight on the pension issue because he sees the writing on the wall and has nothing to lose by calling attention to the problem. The pension system can NOT be saved in its present form unless the Federal Govt bails the state out or the Constitution is amended to allow the State to coin its own money (I think they will amend the “impairment of contracts” clause first).

      As a non resident (though I do still own a business organized under the laws of NJ), I take Christie at his word that he gives a crap about NJ. He knows there are just not enough “millionaires and billionaires” to offset the increasingly grim picture,. The number will only get smaller with a “millionaire’s tax”. He will fight a battle that he can only win, if at all, for the short run.

      I left NJ last year because I was resigned to the fact that even though NJ would likely dodge a bullet by not electing Buono, there was no way the mixed up people of NJ would ever replace Christie with another Republican. Corzine made them mad, but like the sheep that they are, they have short memories and are influenced by the media and the kind of pandering they get from all sides (even from what I once believed was a neutral blogger).

      Once Christie is out of office, the pandering to the unholy alliance of public sector unions and the urban underclass will resume, and a tax on “millionaires and billionaires” will be touted as the cure for every underfunded mandate dished out by the populist hypocrites in Trenton. It will fail and only hasten the demise.

      Anyway, I congratulate you again on reaching the age of 65 as a member of the new middle class (those who work for government in all its incarnations). You are a true inspiration to a generation of folks who are motivated to get us much as they can and let the next guy worry about paying for it. I am only gratified to say that I am no longer that next guy….


      • Posted by JM on May 27, 2014 at 4:30 pm

        I also congratulate you for leaving the State that was a smart move, I left also but did you ever stop a moment to think that wherever you live even though they are less your taxes sales, income, real estate etc are still supporting the pensions of public employees.So you cannot escape the problem. You can just brag as can I that you left this s*** hole of a state.

        Not publix that is a supermarket (I go there often). BTW it is KrispyKreme…down here we have Dixie Cream which are much better donuts and I do know my donuts.

        Also I don’t know about unholy alliances when I retired the pension was over 100% funded and I received a 65% pension which was only 5% more than I was promised when I started my career if the unions got that for me I thank them. I am in PFRS Local which is in much better shape than the state plans as the locals have (as required by the state thats a good one) been putting in more each year as compared to the States nothing. The States not funding their share caused this problem.

        There is not one big pension system which is what Governor Chris Christie (whew that hurt) would like you to believe. There are several local and state funds with different funding levels. The locals are in much better shape than the state. So when the governor states the funding level is at a certain level lets say 50% he is also counting the local plans which may be at 70% uplifting the levels of the state plans which may actually be 30%.

        If you are truly a business owner and have employees how long do you think you could tell the feds that you were not going to give them your share of your employees social security contributions before they slapped a lien on your business. Not funding the pension was an immoral and perhaps criminal act by the governors who did so. Including Krispy Kreme.

        I must go now the beach is calling my name. They are free here so I will not deplete my funds no gas even I just have to walk off my deck.


        • Sorry if i led you to believe I had employees – I use independent contractors. As for you having moved out of state, I was certain this was the case without you saying so. I hope we get some hyperinflation so your pension will enable you and your wife to afford some catfood when you get hungry.


          • Posted by JM on May 27, 2014 at 8:33 pm

            I will be fine thank you for your concern….so many places down here give you free food as long as you are indulging during the happy hour 2 for 1 drink specials to drown ones sorrows. Some places (especially at the beach) have happy hour all day. oops that reminds me free Taco Bar tonight… I’m on my way…..

    • Posted by Tough Love on May 27, 2014 at 8:31 pm

      Quoting JM …. “I also worry about the effects on my widow when I pass”. If you’re concerned about your pension ending when you die, then (assuming you were married at the time) it sounds like you didn’t elect to take a slightly lower pension (usually 10-15%) to continue 100% of your pension to your wife until she died. Not very nice.


      • Posted by JM on May 27, 2014 at 8:38 pm

        Thank you for your concern but in PFRS she will continue to receive a pension based on 50% of my final BASE salary plus COLA (Until discontinued) for the rest of her life (unless she remarries) and free lifetime medical benefits paid by the city I retired from. My concern is if there is any attempt to reduce these payments.


        • Posted by Tough Love on May 27, 2014 at 8:57 pm

          You had an option to have her continue to get 100%? How would YOU like to get your pension halved? Think she deserved that so you could get a bit more only while YOU are alive?


          • Posted by Anonymous on May 28, 2014 at 2:18 am

            Not 50% of pension, 50% of final sal.

          • Posted by JM on May 28, 2014 at 8:51 am

            TL:There was and is now no such option in PFRS at the time I retired. And anonymous is correct it is 50% of final salary. If you give false information about this easily checked fact and also well known calculation how can any of your other (cut and pasted…see I read all the other articles in many papers online you reply to with the same posts word for word) how can any of your posts be taken seriously.

  4. Posted by Mr. Anonymous on May 27, 2014 at 3:59 pm

    Christie stopped thinking about NJ 2 years ago if you were paying attention. Where ever you wound up please stay there. There are enough callous jealous people here. Glad you left dickbag. I could point out everything about your post that is backwards but I think my last comment covers it.


  5. Posted by Anonymous on May 27, 2014 at 4:15 pm

    The state will not default on pensions. First, they have no means of defaulting . Second that state would be in chaos–the entire state. That will not be allowed to happen. You have a better chance of selling the turnpike. Remember, most of the money that is currently in the system is from the employee, not the state. The state can’t declare bankruptcy, only municipalities. Nor can they just take the employees contributions. The key issues is HOW will the state pay for their obligation. It can be bonded over many years if necessary. Very interesting that the state can’t just switch–because the employees are paying the retirees AND because an employee having a VESTED pension can’t be reduced.

    This will become painfully clear when the state loses the COLA case. The state cannot choose whom to pay and whom to not pay.


    • Posted by Tough Love on May 27, 2014 at 6:50 pm

      Delusion and Denial ….. pretty sad combination.


    • A state, in our Federal system can repudiate its debt. The Constitutions (NJ and US) can be amended, and even if they aren’t, state action is not prohibited but rather subject to a strict scrutiny test (absence of less extreme alternatives to meet a compelling state interest). I submit that such a threshold will be met long before all other state expenditures are completely crowded out. FWIW, the social security and medicare systems are unfunded to tune of 100 trillion dollars plus. When that bill comes due, you WILL miss your COLA. LOL


  6. Posted by Javagold on May 27, 2014 at 5:20 pm

    Funny that the Revenue Pirate JM, left the state. But we are supposed to sit here and pay whatever tax raise is needed so JM can retire in luxury (and not even keep the money on state)…65 , so how long have you been retired 10 years… 15 years ????


    • Posted by JM on May 27, 2014 at 6:30 pm

      That’s right and you will continue to pay. If I were a private worker and left the state you would have no problem. a** hole. 17 years if you must know. Your elected officials promised this pension when I took the job so I guess we both have to live with it.


      • Posted by Tough Love on May 27, 2014 at 6:54 pm

        Wow, you certainly have been sucking at the Taxpayers teat for a long time. You’ve ALREADY received MORE THAN what was fair to Taxpayers. Hopefully you get a big haircut with the Christie changes.


  7. Posted by lipper on May 27, 2014 at 5:21 pm

    Default is not an option and it would set a very bad precedent for sovereigns all over the world. Government credibility is all that stands between us and anarchy. If NJ has to sell a portion of Island Beach state park to Toll Brothers to meet its obligations (not only pensions but any legal obligation duly attested to in law) then that is what needs to happen.


    • Posted by Tough Love on May 27, 2014 at 7:35 pm

      Taxpayer assets, whether cash, property, tax collections, etc. are really all the same.

      Taxpayers should focus on the unnecessary, unaffordable, and unfair (to them) extreme generosity of Public Sector pensions (and retiree healthcare) with a goal of material reductions for the future service of all current workers….. as an immediate first step.

      If financially needed (and it is in many cities), to the extent public Sector pension formulas & provisions exceed those of Private Sector Taxpayers, even for PAST service accruals, benefit reductions are more appropriate than tax increases to keep this unjust gravy train rolling along.


  8. Posted by Tough Love on May 27, 2014 at 6:21 pm

    John, Nice post. Hopefully the Christie proposal will be similar to the RI DB Plan changes with ALL current NJ DB Plan participants (INCLUDING safety workers and Judges) with less than 20 years of service will be switched over to a more modest DB Plan with certainly NO MORE than a 1% of pay factor (the same as the current Plan for Federal employees) and an unreduced retirement not before age 65 (perhaps 62 for Safety workers) and with full (actuarially equivalent) 5-6% per year payout reductions for each year payout begins before the full retirement age.

    And hopefully, an immediate replacement of ALL retiree healthcare subsidies with a Health Savings Account taxpayer-deposit of no more than $300 annually.

    It’s ABOUT TIME the decades-long financial “mugging” of NJ taxpayers will Finally be addressed.

    And as to your final “bullets”, you left out a very important one …. the insatiably greedy Public Sector Unions & workers.


    • Posted by Anonymous on May 27, 2014 at 9:12 pm

      John, Unions are suing in Rhode Island so do you think their changes will be upheld in court? Politicians cant be trusted with any plan. and taxpayers will overpay because of the politicians inability put any money at all aside. They will drive the state further and further into debt whether it be with pensions or some other means. Taxpayers will always be drained as much as possible.


  9. Posted by Anonymous on May 27, 2014 at 6:48 pm

    Wait till TL wakes up from her Memorial Day drinking binge, she will have plenty to say in rebuttal! yeehaw


    • Posted by Tough Love on May 27, 2014 at 7:56 pm

      You’re a mix of 10% amusing, 20% a sad case, and 70% simply pathetic.

      Please show your comments to your associates and see if you get Hi-5s or simply a look that says ….. WTF is wrong with you.


      • Posted by JM on May 27, 2014 at 8:28 pm

        That’s what we all think of you were you looking in the mirror when you posted your first sentence. LOL Well at least I can laugh about it all.


        • Posted by Tough Love on May 27, 2014 at 8:47 pm

          Did you see my earlier comment? Did you really put your wife’s security at risk by NOT providing for a continued pension for her if you died first…. just so YOU could get a bit more while YOU were alive?

          Yea, we’re all impressed with you.

          Is your wife aware of your selfish choice ?


          • Posted by Anonymous on May 27, 2014 at 9:20 pm

            It is so darn easy to pull TL’s strings By the way, . I provided my wife with 100 percent of my pension when I die and she is 20 years younger than me. TL will make sure she doesnt get one red cent of my 1400 per month. I dont deserve it, neither does my wife according to TL I worked 30 years with profoundly retarded children as well as special needs children and court adjudicated youths.. I am greedy and selfish. I got very rich doing this and I dont deserve half of the money I can gettting, according to TL. The world according to TL

          • Posted by Tough Love on May 27, 2014 at 9:38 pm

            Anonymous, let’s back into your pension ……. Not sure, but lets assume after 30 years it’s 60% of pay. Then if you just retired with no COLAs, your final monthly pay would be 1400/0.6 = $2,333 or $28,000 annually. After 30 years?

            Unless you’re dumb as a rock or totally incompetent, I don’t believe a $28K annual pay level after 30 yrs.

          • Posted by JM on May 28, 2014 at 8:56 am

            TL: Yes I did and I replied to it. What planet do you live on. PFRS provides the following survivor pension. Pension is recalculated at 50% final SALARY rather than 65% and then the COLA (up until its temporary elimination ) is added back in. That is the only option available under PFRS. Dolt

  10. Posted by Anonymous on May 28, 2014 at 12:08 am

    Well TL, your name is Manuel. you are from Barcelona and you know nothing! By the way, you forgot to factor into your brilliant equation that my wife is 20 years younger than me and will be receiving 100 percent of my pension after I die. Who is the rock now, dumbass! bwahahahahahahaha. Oh Lord , you cant make up this stuff!


    • Posted by Tough Love on May 28, 2014 at 12:16 am

      If your pension is really only $1400/mo after 30 years of Public Service, clearly you are.


  11. Posted by Anonymous on May 28, 2014 at 12:44 am

    TL Queen of Denial! Complains I am overpaid and receive an excessive pension, finds out I was underpaid and that I receive a skimpy pension. Instead of being greedy, I am dumb as a rock or totally incompetent. So following her logic if public workers accept a smaller pension and lower pay, they would indeed be dumb as rocks and very incompetent. She is on our side after all, I knew it!


    • Posted by Tough Love on May 28, 2014 at 1:00 am

      If you really had a $28K final pay level at the end of 30 years in the Public Sector (where even the most incompetent move up the ladder), you certainly must be “dumb as a rock” (or really pissed of some well-connected people), and that 60% of pay PUBLIC Sector pension likely would have been 30-40% of pay in the Private Sector.

      So even dump-as-rocks Public Sector workers get excessive pensions.


      • Posted by Anonymous on May 28, 2014 at 2:22 am

        Option factors vary with age difference.


        • Posted by Anonymous on May 28, 2014 at 5:50 am

          She doesnt understand the system, she proves that on a hourly basis!


          • Posted by anon on May 28, 2014 at 10:11 am

            What is her background? Have seen her here with comments generally based on emotion and canned phrases rather than thought and doesn’t seem to engage in substantive debate, but what is her background?

          • Posted by truthnolie on May 28, 2014 at 1:30 pm

            Her “background” seems to be the padding on the floors & walls of the secure room she is in. Unfortunately…her keepers must have agreed to give her internet access to rant & rave & post her delusions here so they wouldn’t have to deal with her.

  12. Posted by Sigh on May 28, 2014 at 2:32 am

    I’m taking it that Christie isn’t aware that:
    1. DC plans require saving based on the oldest age you think you might be, while pooling mortality risk allows saving to the average age you expect to survive too
    2. DC plans require asset allocation adjustments as you have less human capital of expected work life left while pooled retirement plans allow more stable asset allocation in line with desires for risk and reward
    3. DC plans have much higher expense ratios, so more has to be contributed for same effect
    4. People are notoriously challenged in investing, and rational expectations is not held up by experience of individual accounts
    5. The cost of annuitizing privately is much higher, so again a larger benefit has to be accrued under a DC plan to achieve same level of security

    Instead, why doesn’t New Jersey work to develop a new design that meets their needs, both for HR needs such as the superannuation of state employees and taxpayer desires? Instead of taking a model that doesn’t meet their objectives or combining several models that don’t, work to design something that does. In New Jersey’s case, this will involve sharing investment risk, but pooling mortality risk, annuitization risk, and investment management. This is a harder path than just shoving something into place as “action,” but New Jersey could be leaders in working with the IRS on ensuring determination.


  13. Posted by Tough Love on May 28, 2014 at 9:16 am

    Quoting … “Instead, why doesn’t New Jersey work to develop a new design that meets their needs, both for HR needs such as the superannuation of state employees and taxpayer desires? ”

    Because the insatiably greedy Public Sector Unions & workers refuse to negotiate giving up the current (extremely generous and hence extremely costly) arrangement under which the funding of current DB Plans falls 80-90% on the Taxpayer (with only 10-20% on the workers), while the workers always get a pension AT LEAST 2x greater than their private sector counterpart, MOST OFTEN 3x-4x greater, and for safety workers USUALLY 4x-5x greater.

    Looks like Gov. Christie realizes this and will be forcing the needed changes.


  14. Posted by Tough Love on May 28, 2014 at 11:11 am

    Play it a few time. Then, perhaps it will sink in.


  15. Posted by Anonymous on May 28, 2014 at 6:12 pm

    Fool me once shame on you, fool me twice shame on me. fool me three times you are a perfect candidate for Governor of New Jersey! Booyah!


  16. Posted by Tough Love on May 29, 2014 at 12:17 pm

    Quoting from (the end of) …..

    “New Jersey pensions are going under, even after the multiple rounds of “reform”. The amount of money to make them whole is not going to come from NJ taxpayers, and there will not be a federal bailout. Mainly because the feds can’t bail them out. The hole is just too big.

    The question is mainly the timing of the moment of truth (while the balance sheet looks awful, the cashflows can keep on for some years before hitting zero), and how everybody is going to get hit, including taxpayers. There’s not much going for Jersey other than being cheaper than New York and Connecticut, and once that’s no longer true, why stay? “


  17. Posted by Anonymous on May 29, 2014 at 2:09 pm

    New Jersey pensions are not going under. There have not been multiple rounds of reform. The money will come from NJ taxpayers mainly because they have the money. They may be a federal bailout as well. New Jersey is a wonderful place to live, please dont leave and please pay your taxes!


  18. I just read this post and I think there is a third factor behind NJ’s pension disaster other than undercontributing and over promising: the state’s own post-2001 economic stagnation.


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