CF6: Cash Balance No Cure-all

The pension commission suggested implementing a cash balance plan (per page 10 of the Roadmap):

Once the existing pension plans are frozen, new plans would be needed to provide employees with the means to earn future retirement benefits. The Commission believes that what is known as a “cash balance” plan provides the best model for the new plans. A cash balance plan is a hybrid defined benefit plan that expresses the employee’s benefit as an account balance that, as proposed by the Commission, grows by “pay credits” based on an employee’s salary, and by periodic “interest credits” based on the account’s balance and some defined measure of investment performance. Under the form of a cash balance plan envisioned by the Commission, an employee would be guaranteed both the contributions based on pay credits made to his or her account.

Design is all-important but if the idea is to have a flat percentage of salary as the  “pay credit” it would solve the equity problem of participants close to retirement accumulating massive benefits but the biggest problem and source of all the coming misery remains.

The New Jersey retirement system is bankrupt primarily because politicians, abetted by actuaries, got to pick their contribution amounts.  That would not change with a cash balance plan which is still a defined benefit plan that uses funding methods susceptible to manipulation.

All a switch to a cash balance defined benefit plan will do (as IBM employees learned) is curb outsized accruals for older employees which those employees  might consider discriminatory (as may a Superior Court judge eventually).

14 responses to this post.

  1. Posted by Tough Love on February 28, 2015 at 2:23 am

    Quoting …. “The New Jersey retirement system is bankrupt primarily because politicians, abetted by actuaries, got to pick their contribution amounts. That would not change with a cash balance plan which is still a defined benefit plan that uses funding methods susceptible to manipulation.”

    But the cash Balance Plan WOULD (if the %-of-Pay contributions AND the interest crediting rate is consistent with those of Private Sector Cash Balance Plans) address the ROOT CAUSE of NJ’s pension mess …. grossly excessive “generosity”. It would finally END.

    Given the typical 4% or so interest rates typically credited to Cash balance Plans, there is no need to s-t-r-e-t-c-h the assumptions.

    Reply

    • Posted by dentss dunnigan on February 28, 2015 at 11:21 am

      If you get a chance and opportunity this weeks FORBS has an article on pensions (mostly corporate) but it addresses the problems pensions have in such a low interest rate environment ,and with stocks fully valued it points how assists in pensions simply cannot keep up to it’s liabilities ……

      Reply

  2. Posted by Tough Love on February 28, 2015 at 2:32 am

    Quoting …”All a switch to a cash balance defined benefit plan will do (as IBM employees learned) is curb outsized accruals for older employees which those employees might consider discriminatory (as may a Superior Court judge eventually).”

    Yeah, like a mid-career NJ judge not wanting his/her back-loaded pension to vaporize.

    P.S…. and what’s not……. necessary, just, and fair to TAXPAYERS … about curbing outsized accruals for older employees, given that in totality (over the workers entire career) their pensions are unaffordable and FAR to generous when compared to those typically granted comparable Private Sector workers ?

    Reply

  3. Posted by Anonymous on February 28, 2015 at 2:33 am

    Quoting, since you like to quote, why not quote Christie when he claimed to have saved the pension system in 2011 and claimed that all future and present public workers would be thanking him, and it was the law that contributions would be made. laughable that you even now believe what he will claim to accomplish

    Reply

    • Posted by Tough Love on February 28, 2015 at 2:57 am

      You should (at least occasionally) suggest possible solutions, instead of just complaining.

      Reply

      • Posted by Anonymous on February 28, 2015 at 8:17 am

        You should get your head out of the sand and stop believing the politicians are gong to do the right thing. No matter what happens, they will not. You are the type of person they dream will always keep voting for them.

        Reply

        • Posted by Tough Love on February 28, 2015 at 12:20 pm

          More of the same ….

          Like I said above ….. you should (at least occasionally) suggest possible solutions, instead of just complaining

          Reply

  4. The bottom line is most of this isn’t going to happen. He had his chance in 2011 when he was popular and failed. Fast forward to 2015 and guess who is the joke of NJ and apparently the republican party as well if you read blogs. That’s right our boy piggie. The guy who loves to borrow money and leave the bill for the next administration. That’s his solution for our trans.trust fund. Our inept governor’s time has past. The people of the state know it,the dems. know it, the republican party knows it, the judiciary knows it. Only two people still don’t get it: piggie and the guy on here that posts 5 responses for every one.

    Reply

  5. Posted by Tough Love on February 28, 2015 at 8:44 pm

    Quoting … “He had his chance in 2011 when he was popular and failed.”

    Perhaps Christie’s time HAS passed, but the pension problem hasn’t gone away, and Christie is the ONLY one with the guts and stomach to stand up to the greedy Public Sector Unions……. and he IS trying to fix a problem that if not fixed, will assuredly result in material pension/benefit reductions being FORCED upon you in the not-too-distant future.

    If you don’t get it, ask the smartest (mathematically inclined ) person you know (who ISN’T a Public Sector worker/retiree for their HONEST opinion.

    Reply

  6. Posted by truthnolie on February 28, 2015 at 9:24 pm

    http://www.nj.com/politics/index.ssf/2015/02/poll_is_christies_new_nj_pension_plan_likely_to_pass.html#incart_hbx#incart_best-of

    Almost 90% think plan doesn’t have a chance at passing……that’s about right but they should have offered a choice for “Not a snowball’s chance in hell”

    Reply

    • Posted by Tough Love on February 28, 2015 at 10:28 pm

      Not terribly meaningful considering that (a) NJ.com is likely THE most liberal Public Sector Union-supporting news-site in existence, and (b) with likely 90+% of it’s readers (and almost ALL of the commentators) are Public Sector workers/retirees, would they vote otherwise?

      Non-Public-Sector worker/retiree Taxpayer would certainly support this measure … as necessary, just, and “fair”, but recognizing that it’s NJ’s Union-BOUGHT-OFF legislators must approve it, I would agree than it has little chance of passing as currently proposed.

      Reply

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