The Flaw in New Jersey’s Public Pension System

In response to what is likely to be a recommendation by the commission studying New Jersey’s public pension system to abandon defined benefit plans for public employees a couple of union-backed think tanks released a report today warning against such a move on the argument that:

There is no flaw in the basic design of New Jersey’s defined benefit pension plans, as long as these are managed well.

They are dangerously mistaken.  There is a fatal flaw.

Everyone has an incentive to lie about costs and there is no independent enforcement authority that immediately benefits from the truth.

  1. Participants get promises of benefits that will never be funded and eventually forfeited
  2. Taxpayers through their politician representatives get to pay ridiculously understated contribution amounts until such time as the money runs out
  3. Actuaries get outsized fees for providing a veneer of professional cover

Defined contribution plans offer transparency.  That’s really what everyone involved in this charade is afraid of.

30 responses to this post.

  1. Posted by skip3house on October 7, 2014 at 5:48 pm

    This study defies common sense.
    How can an employee financing own pension cost NJ money?


  2. That is not unique to NJ, but true of all public pension plans.


  3. Since 1969 the public higher education crowd has been mandated into the DC plan known as the Alternate Benefit Program. Maybe the super success of this retirement plan gives the Commissioners cover to recommend it for the entire workforce


    • Posted by Anonymous on October 7, 2014 at 9:06 pm

      It would be very easy to switch a plan that didn’t have a retiree population, you exchange defined benefit plan for a defined contribution plan everyone is switched. Defined benefit plan would lose its revenue stream that replaces the money distributed to retirees, db plans need existing employee contributions and investment income for solvency. If the employer switches to a dc plan, how will no insurance based lifetime payouts continue for retirees?


      • Posted by Anonymous on October 7, 2014 at 9:21 pm

        non insurance based


      • Posted by Endalimony4ever on October 8, 2014 at 11:10 am

        Sounds like a ponzi scheme?


        • Posted by Anonymous on October 8, 2014 at 1:14 pm

          I don’t understand why NJ didn’t have a long-term group annuity define benefits plan with an insurance company.


          • Posted by Hoboken_Guy on October 8, 2014 at 2:10 pm

            Because the benefits of that annuity wouldn’t be rich enough to secure the Union votes. If you wanted to make the annuity payments rich enough you’d actually have to pay as you went and the tax payer wouldn’t have stood for that high of a pension expense.

            This has been smoke and mirrors for many many years.

          • Posted by Tough Love on October 8, 2014 at 8:02 pm

            Hoboken_Guy, Right on.

            You’re one of the few who really see what’s going on and driving this … Public Sector Union/worker greed and our enabling (self-interested) elected officials.!

          • Posted by Anonymous on October 8, 2014 at 8:38 pm

            What? Both employer and employee pay each pay period in dc or even plans. The union executives do not factor in the pension payment process, db deductions go to the treasury pension and benefits, dc deductions are forwarded to providers. Elected officials pension contributions for dc plans are collected from their paychecks, please explain your understanding of union/elected official corruption in this process?

          • Posted by Anonymous on October 8, 2014 at 8:39 pm

            or defined benefit plans.

  4. Posted by Anonymous on October 7, 2014 at 8:00 pm

    Defined contribution plans are transparent until the participant selects lifetime income, the payout process is shrouded in secrecy. Check the NJABP see how less information is available about lifetime income payouts.


  5. Posted by truthnolie on October 7, 2014 at 8:16 pm

    Here is the article regarding it on

    “Changing N.J. pension system to 401k would cost $42 billion, liberal think tanks say”

    JB, you state it was a “couple of union-backed think tanks”…..but the two mentioned in the article (Keystone and NJ Policy Perspective) don’t appear to be union “fronts”….In fact Keystone shows a small amount of funding (9%) from “Unions” – that doesn’t seem to be enough to call it “union-backed” :

    Also – in the article mentioned above it states (in the PA case) it was state actuaries who did the analysis that caused the state to pull back from switching:

    “In Pennsylvania, state actuaries, in response to a proposal by Gov. Tom Corbett, conducted an analysis of how much it would cost to shift to a 401(k).”

    “What did actuaries in Pennsylvania estimate would be the transition cost? Forty-two billion,” the report’s author, Keystone Research Center Executive Director Stephen Herzenberg, said in a call with reporters. “So it’s no surprise that when Pennsylvania’s legislature got that eye-popping estimate in May and June of last year, that led Pennsylvania to back away from a switch to a defined contribution account.”


    • Keystone probably does more thinking for other sponsors. This report is to pay off that 9%.

      It’s absolutely silly (even by public pension actuarial standards) to use the $42 billion number from another state but the idea of propaganda is to get a number out there. I agree it could cost more to switch to a 401(k) plan since a 22-year-old entering the system who has to pay 10% of his salary for a pension will likely accrue much less under a DB plan as compared to getting that 10% put into a Defined Contribution plan. The thing is nobody has defined what the 401(k) or hybrid plan would look like so anyone who takes that $42 billion number from PA seriously is either an idiot or looking to convince idiots.


  6. Posted by Anonymous on October 7, 2014 at 8:30 pm

    when I got hired as NJ state employee I was not happy that I had no choice but the pay into the pension system. Maybe they should let people decide for themselves if they want to pay, I bet alot of people will take the extra money believe it or not.


    • Posted by Anonymous on October 7, 2014 at 9:18 pm

      Life’s lessons teach that forced retirement in public plans benefit public employees in the long run. The money is pretax, therefore it provides present income tax benefit. People who opt-out would end up on public assistance, food stamps, housing assistance etc. The employee contributions increase with salary/reforms but employees can take their contributions on termination or leave them until retirement. DC plan money can be rolled over to another employer or an IRA, opting out of public pensions is isn’t in the best interest of the individual or the public.


      • Posted by Tough Love on October 8, 2014 at 12:33 am

        Quoting …”People who opt-out would end up on public assistance, food stamps, housing assistance etc. ”

        You mean like virtually all PRIVATE Sector workers whose employer-sponsored retirement packages are virtually always just like the opt-out-option you describe ?

        Of course I was being sarcastic.

        WHY do YOU deserve a better deal than Private Sector Taxpayers who you want to pay for YOUR pension ?


        • Posted by Anonymous on October 8, 2014 at 8:30 am

          Are you a bored teenager who repeats the same stuff over and over? Public employees are taxpayers. Employment contracts in the public sector are collectively bargained, dc hybrid plans will work for employees with years left to accumulate funds, the conversion will negatively impact those close to retirement and retirees under the old defined contribution plan. Insurance based annuities are an option if it’s pooled group plan, there is a viable option. Public dc plan are 401a, 403b and 457 not 401k. Public sector plan require a lifetime annuity option. The private sector 401k retirees have tax relate payout issues based on ordinary income, also the money must be withdrawn fully by a certain age. 401k wealth management schemes for estate planning wasn’t the intent retirement is the expected IRS outcome.


  7. Posted by Tough Love on October 7, 2014 at 10:39 pm

    John, Perfect , simply perfect.


  8. Posted by Tough Love on October 7, 2014 at 11:32 pm

    I pasted the comment just below (in John’s PRIOR article) in response to commentator Truthnolie’s quoting the Title of the article linked in THIS post from John . Since that article is Linked in THIS report, my comment seems more appropriate here, so I have re-posted it below.
    Truthnolie, Anyone who truly understands pension design and funding knows that your statement quoted above is patently false when the word “cost” is properly defined. The following explanation is not really meant for YOU, because (whether you truly understand it or not, clearly you comment only to support the grossly excessive, unnecessary, and unjust pensions granted Public Sector workers, and based on your many previous comments, you have no problem omitting pertinent facts, distorting the truth, and outright lying). I offer it for readers who prefer transparency, honesty, and the truth.

    The FACTS …………

    The annual “cost” of pension accruals associated with a given year of employment are based on the richness of the Plan formula and Plan provisions, regardless of whether the Plan is a Defined Benefit (DB) Plan or a Defined Contribution Plan (DC). Either can be DESIGNED to be MORE or LESS costly.

    DC Plans, which are the most common Plan offered Private Sector workers (under IRS Code section 401K) typically include employer contributions of from 3%-5% of pay. In the Private Sector, those 401k employer contributions plus Social Security (for which the employer contributes 6.2% of pay on the employee’s behalf) typically encompasses the Private Sector worker’s entire retirement package. Note that as a level % of pay that total is just about 10% of pay for the Private Sector worker. And THAT 10% is indeed the correct measure of the annual “COST” of this retirement package.

    Now let’s compare that to what PUBLIC Sector workers typically get …… and in doing so we should keep in mind that most NJ workers (except police … I believe) do indeed participate in SS, costing their NJ employers (meaning Taxpayers) that same 6.2% of pay.

    NJ’s PUBLIC Sector workers are promised DB (not DC Plans) and due to the richness of Plan “formulas” and the generosity of Plan “provisions” (such as VERY young full-unreduced retirement ages, and up until recently suspended, COLA increases … which look like they will be reinstated under Court challenge) are MUCH MUCH more costly (always multiples more costly) than the cost of DC Plans granted Private Sector workers.

    While the “Cost” of a Private Sector DC 401K Plan is not subject to debate … it’s simply the % of pay contribution in the year (and, as stated above, is typically 3-5% of pay annually)….. the annual “COST” of a DB plan CANNOT be definitely determined until all Plan participants have died. That’s because DB pensions don’t promise CONTRIBUTIONS, but BENEFITS (paid annually as a life annuity in retirement) and the actual “COST” of such promises is dependent on FUTURE investment earnings rate and FUTURE participant mortality rates. As such, actuaries annually ESTIMATE the annual cost of benefit accrued in that one year, called the “normal cost”. Since ACTUAL developing investment and mortality will never exactly equal prior year ESTIMATES, the actuaries “normal cost” figures will always be high or low and if low, the shortfall (resulting in unfunded liabilities) is made up with annual contributions IN ADDITION TO the “normal cost”. Those additional contributions, together with the “normal cost” equal the annual ARC.

    But it gets more complicated ……..

    The actuaries calculate the normal cost and ARC annually, but NJ (and many other gov’ts) contribute much less that the ARC amount specified by the Plan actuary. So, not only do funding shortfalls arise from investment and mortality experience different than that assumed by the actuary, but from Plan contributions less than the ARC specified by the Plan actuary. As an example, due to budget constraints, NJ created a schedule to linearly grade into paying the full ARC over a 7 year period. These less-than-full ARC contributions will cumulatively INCREASE NJ Plan underfunding by about $15 Billion over the 7 year grade-in period.

    Sorry, I digressed a bit above ……

    While as I stated earlier, the ultimate “cost” of a DB pension (expressed as a level annual % of pay) CANNOT be known until all participants die, it IS estimated annually in a self-correcting process that would (under ideal circumstances) lead to (an “expected”) fully-funded pension upon each employee’s retirement.

    Huge amounts of prior experience and detailed knowledge of the actual Plan participant population enables accurate “COST” estimate RANGES, again expressed as a level % of pay. These reasonable ranges come about because the (investment, mortality, and other) assumptions that go into DB contribution calculations themselves have reasonable ranges. As one example, a Plan will ultimately “COST” less if on-average Plan assets earn 10% annually than if Plan assets earn 5% annually.

    Now the nitty gritty ……..

    The reasonable annual “TOTAL COST” range (as a level % of pay) just for the “normal cost” alone (EXCLUDING incremental amounts necessary to amortize existing Plan asset shortfalls) is 20%-35% of pay for non-safety workers (incl teachers) and 40%-50% of pay for safety workers. Yes, these high annual %-of-pay contribution ranges are indeed necessary to fully fund a Public Sector worker’s pension OVER THEIR WORKING CAREER (as it should be, and NOT passing the costs on to FUTURE generations).

    Now lets compare to our Private Sector worker (in the earlier paragraphs above). Non-safety Public Sector workers generally DO participate in SS so the 3%-5% of pay 401K employer DC Plan contribution is directly comparable (apples-to-apples) with the 20%-35% of pay TOTAL COST of their DB pensions LESS the typical 5% contribution they THEY directly make. Bottom line for non-safety workers ….. the Taxpayer is “responsible for” Public Sector Plan contributions somewhere between 15% and 30% of pay annually vs the 3%-5% that they typically get from their employers …… over 5 times MORE than what THEY get.

    For safety workers (who, per my understanding do not participate in SS), the roughly 10% of pay Private Sector employer contribution (401K + SS) is directly comparable to the Taxpayer contribution of 40-50% of pay, less the typical safety worker contribution of about 10%. Bottom line for safety workers ….. the Taxpayer is “responsible for” Public Sector Plan contributions somewhere between 30% and 40% of pay annually vs the 10% that they typically get…….. 3 to 4 times MORE than what THEY get.

    Unless you’re quite short in “grey matter”, it indeed seems inconceivable that a switch of Public Sector workers from their VERY generous DB to DC Plans (of equal generosity to those typically granted Private Sector workers) could cost MORE …. because it does not. And it is unlikely Public Sector workers could convince elected officials to grant DC Plans with more than VERY modestly higher “CONTRIBUTION” percentages (than those typically granted Private Sector workers) because the unfairness would be too obvious (unlike the myriad of ways the VERY high costs of DB Plan can be “hidden”). ANY reasonable DC Plan for future service years will ALWAYS “COST” far far less than currently promised Public Sector DB Plans.

    Now, here’s how biased, uninformed, or outright charlatan writers come about saying that a conversion from DB to DC Plans would “COST” more ……….

    (1) Since the current DB Plan would be frozen, they point to the end-of and need-for future-year active employee contributions to sustain the DB Plan. That is patently absurd because under current NJ practices TOTAL Plan contributions for any one employee are far less than the best-estimate cost of THAT employee’s annual pension accrual alone, certainly leaving NOTHING available to be diverted to pay for those currently retired or soon to retire, In fact, the assumption that such continued employEE are needed is the epitome of a PONZI scheme.

    (2) Some argue that in rundown mode, Plan assets must be invested much more conservatively, and sometime argue that GASB accounting rules require faster amortization of existing Plan shortfalls. First, that latter is simply false, as there is no such GASB requirement. And, for MANY years there is VERY little need to change investment allocations.

    (3) and the most egregious …. the added “COST” that such writers point to comes from NOT comparing the true (actually known) DC Plan COST to the true “best estimate” DB Plan cost (from the ranges I noted above), but by comparing the DC Plan COST to what NJ is ACTUALLY CONTRIBUTING (as a % of pay) today. Indeed NJ is actually contributing very little as a % of pay, but what NJ now ACTUALLY CONTRIBUTING is by no means the “COST” of annual pension accruals. And that huge annual shortage (with interest) between the TRUE COST and what we are actually contributing is growing exponentially.

    So that the readers don’t walk away thinking that all I’ve done (beyond dis-proving the the quoted statement that a switch to DC plans would “COST” more) is to support the Public Sector workers’ contention that the taxpayers have consistently underfunded their promised pensions, there is MORE to the story.

    Public Sector Unions/workers like to blame our financial predicament on UNDERFUNDING these promised pensions. But what they will NEVER discuss is that the “normal cost” and associated “FUNDING” is directly proportional to the generosity of the promised pensions. E.g., if you make the promise twice as big, the required funding is twice as great. So ONLY looking at whether taxpayers have “funded” appropriately per Plan promises, completely ignores the VERY important issue of whether the funding requirements are so high BECAUSE the promised generosity is too great.

    I strongly contend that it is. In fact, it is specifically BECAUSE these Plans are so “GENEROUS” that the level annual % of pay contribution requirement are roughly 5 times (see above) greater than what Private Sector employers are willing to contribute to THEIR employee’s retirement Plans (see above discussion).

    Under ANY reasonable analysis, Public Sector pensions are always AT LEAST 2x greater in value at retirement than those of comparable Private Sector workers retiring at the SAME age with the SAME years of Service and the SAME pay, MOST OFTEN 3X-4X greater, and for safety workers USUALLY 4X-6X greater.

    THAT, grossly excessive pension “GENEROSITY” is the ROOT CAUSE of the problem …. and funding FOLLOWS from generosity.


    • Posted by truthnolie on October 8, 2014 at 12:20 am

      Wow……you really do have too much time on your hands, huh?

      “you have no problem omitting pertinent facts, distorting the truth, and outright lying”

      Facts/truths being distorted as YOU see it in your convoluted mind. Never lied about anything either, just said what you didn’t want to hear.

      “Under ANY reasonable analysis, Public Sector pensions are always AT LEAST 2x greater in value at retirement than those of comparable Private Sector workers retiring at the SAME age with the SAME years of Service and the SAME pay, MOST OFTEN 3X-4X greater, and for safety workers USUALLY 4X-6X greater.”

      And there it is again…..what it always comes down to with you….you can’t accept and go blind with envious rage that someone is getting more than you because they were smarter or shrewder and chose a better career path. You were probably one of the private sector slugs who looked down upon PE’s and laughed at the lower salaries years ago… that it has turned and time has proven it was actually the best choice to take a PE position (considering job security, pensions, benefits, etc.) you’re incapable of reconciling the fact that people you though were less intelligent , less deserving or beneath you will wind up with more.

      That’s what your whole angle is and has ever been really about….anyone with a basic understanding of psychology can see it and see right through your pathetic fraudulent claims that you are doing this in the interests of “transparency, honesty, and the truth” (BTW, you left out “never ending battle for Truth, Justice and the American Way”……can you also change the course of mighty rivers and leap buildings in a single bound??…..hahaha….ok, Superwoman)


      • Posted by Tough Love on October 8, 2014 at 12:39 am

        No Truthnolie, not smarter nor shrewder …. unless shrewder means knowing that your Union would BUY from self-interested elected officials (with campaign contributions and election support) grossly excessive, unnecessary, and unjust pensions and benefits.


  9. Posted by Tough Love on October 7, 2014 at 11:43 pm


    I must say that with reference to the linked article, I have not seen SO MANY material omissions, gross distortions of fact, and outright lies in one place in decades.

    The liberal Public Sector pension supporters have set a new standard for BS with this Report.


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