CF8: The New Plan

Page 10 of the Roadmap outlines the panel’s conception of the benefits that it believes the state can afford:

Obviously, to be an effective reform, the new plans must also cost less going forward than the old plans would. As a starting point, the Commission has assumed that the employer and employee contributions would each be 4% of salary, with 8% employer and employee contributions for employees who, like many firefighters and police officers, do not participate in Social Security. Based on a total State/local government payroll of $26.637 billion, the Commission estimates the employer cost of the new plans would be $1.23 billion. The Commission believes that this is an affordable initial baseline for contributions, subject to augmentation in the event that quantification of costs and savings establishes the affordability of a higher level of employer contributions.

But what would that mean in real money for, let’s say, a public employee retiring after 25 years of service at a final salary of $100,000?

Below we compare what this retiree would get under the current plan formula* and then what they would have gotten had the cash balance plan being pushed been in place instead during their working lifetime under both the PERS and PFRS plans.

Public Employee Retirement System (PERS)
Current Plan: $95,314 x 25/55 x 13 = $563,219
Cash Balance Alternative: $192,000

Police & Fire Retirement System (PFRS)
Current Plan: $100,000 x .7 x 16 = $1,120,000
Cash Balance Alternative: $384,000

Under both scenarios retirees would get about 34% of the pension value under the proposed cash balance plan that they now get with the current traditional defined benefit plan.

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* PERS assumes high 3-year-average salary and a life annuity normal form of benefit
PFRS assumes final 1-year salary and a J&50%S normal form
The difference in the form of benefit and the later average retirement age typical for PERS retirees accounts for the difference between the PERS and PFRS estimated annuity factors, 13 and 16 respectively.

23 responses to this post.

  1. Posted by Anonymous on March 1, 2015 at 7:32 pm

    Putting aside, for a moment, what new retirees would have for “pension benefits”, this new plan does not solve any of the financing problems for the costs already accrued under the current pension system.

    Gov. Christie has not fashioned any plan to pay these costs with State contributions in accordance with his original 2011 pension reform law – which required specific sums of monies to be paid by the State. If these contributions are contractually required, according to Judge Jacobson, they will have to be paid either through tax increases, budget cutting, other revenue sources (i.e. no more corporate tax breaks) or a combination of all of these.

    No matter what happens, any attempt to avoid paying these obligations will only prevent the State from borrowing in credit markets and worsen our financial condition. Bottom line – the State will have to pay what it owes or risk insolvency.

    Reply

    • Actually there is a plan to pay off the underfunding (though it’s a pretty pathetic one) which I will get to in future CFs.

      Basically it’s to have the state pay off the underfunding over 40 years with the savings they get from moving their obligations for teacher pension and benefits back to the local level through property-tax payers who will be able to afford it with the savings they get from reducing their costs for health benefits as local employees move to much cheaper plans. It’s all supposed to be revenue neutral for taxpayers with public employees at all levels providing the funding as they agree to have their benefits seriously slashed.

      Reply

      • Posted by Tough Love on March 2, 2015 at 3:47 am

        Quoting …” It’s all supposed to be revenue neutral for taxpayers with public employees at all levels providing the funding as they agree to have their benefits seriously slashed.”

        As is necessary, just, and fair to NJ’s Taxpayers.

        And for NJ’s Public Sector workers who feel that it’s not “fair’ to THEM ….. the pensions and benefits that will REMAIN AFTER these proposed changes, will STILL be (in the vast majority of cases) considerably BETTER than those of your Private Sector counterparts. Personally, I see no reason for it to be ANY better that the AVERAGE of what compatible Private Sector Taxpayers get from their employers.

        Reply

  2. Posted by PatB on March 1, 2015 at 7:41 pm

    So plugging that $192k amount into an annuity calculator for 20 years at 5% gives a yearly pension of $15,150. And that is for an $95k employee? If this is on par with what the private employees get, I think society is in big trouble.

    Reply

    • Posted by Tough Love on March 2, 2015 at 4:23 am

      Remember the 3-legged stool …. retirement security via 1/3 pensions, 1/3 SS, and 1/3 personal savings & investment.

      The Private Sector has basically lived by this rule for decades, although with Private Sector “pensions” declining/disappearing, the share from personal saving has had to rise.

      To the chagrin of Private Sector taxpayers (for at least the last 20 years, as Public Sector pensions have grown to extreme levels of generosity), Public Sector workers have enjoyed (and with many feeling that they are entitled to) almost the the FULL cost of THEIR retirements funded by the Taxpayers.

      Well, time to join the rest of us …. you’re NOT “special” on the Taxpayers’ dime.

      If you want a comfortable retirement, fund half of it out of YOUR OWN net pay.

      Reply

      • Posted by Anonymous on March 2, 2015 at 9:45 am

        Remember the 3-legged stool …. retirement security via 1/3 pensions, 1/3 SS, and 1/3 personal savings & investment.

        All well and good as long as:

        1: The employee is permitted to enroll in social security and the WEP provision does not apply.

        2: The employee has enough time to plan his retirement and save for it.

        3: The employee takes the position knowing full well the path to funding retirement.

        4: The state pays their part both into the plan and into SS. We both know that ain’t happening.

        Reply

        • Posted by Tough Love on March 2, 2015 at 1:27 pm

          All BS …..
          .
          (1) In NJ all but Police are in SS, and SS is a real lousy retirement vehicle (re return-on-investment) for those with the high salaries of Police. They are better off w/o it. It’s just an avenue to complain about because they don’t want to save the 6.2% of their net pay that they would have had to contribute to SS. If they didn’t save and invest it, that was THEIR CHOICE, but for comparison purposes, we should assume that it WAS saved, invested, and available for retirement needs.

          The WEP stands for “Windfall Elimination Provision” and was so named (by the SSA) NOT because it is a penalty, but because it “eliminates” an otherwise unjust “windfall”. I’ll bet you knew that …. but thought the readers would buy your bull sh**.that it some sort of penalty.

          (2) What makes the Public Sector worker’s issues in doing so (having enough time to plan his retirement and save) any greater than those of Private Sector workers?

          (3) FUTURE Service pension accruals rates (as well as the continuation of the pension itself) has always be legally subject to change (up OR down) in Private Sector pensions governed by ERISA …. and MANY have indeed been materially reduced (and frozen, as been proposed for NJ’s Plans) when Corporate financial circumstances so necessitate.

          There is no doubt that NJ is in financial “distress”. What makes PUBLIC Sector workers so “special” that they are deserving of not only FAR greater pensions (which is in fact the ROOT CAUSE of NJ’s financial “distress”), but far greater “protections” from reduction (for Future service) when the financial need arises ?

          (4) The State has always paid the employer’s SS contribution for NJ workers who participate in SS. It hasn’t paid the it’s “share” of total pension costs because that share (which is rarely less than 80-90% of total Plan costs) is simply so large, that it’s unaffordable without unacceptable taxation or reduction in essential services, which takes us because to the REASON for that problem ….. your promised pensions are simply TOO GENEROUS (vs those of comparable Private Sector workers) by a factor of AT LEAST 3 when considering BOTH the very rich pension “formulas”, and the very generous “provisions”, such as VERY young full/unreduced retirement ages, the huge cost of COLA increases (recently suspended), the very liberal definition of pensionable compensation, and the ABSURDLY ridiculous ability to be granted a “disability” pension for ailments common to ALL older employees that would NEVER rise to the level of “disabled” in a Corporate LTD Plan.

          Reply

          • Posted by Anonymous on March 2, 2015 at 5:38 pm

            That post is BS only to someone like you who is full of SH*%#

          • Posted by Tough Love on March 2, 2015 at 6:46 pm

            And your response is of course coming from the perspective of a very greedy Public Sector worker/retiree.

    • Posted by Anonymous on March 2, 2015 at 7:32 am

      The pension payout would be from an insurance based institutional group policy not an individual policy, the payout is very different.

      Reply

      • Posted by Tough Love on March 2, 2015 at 1:29 pm

        Likely for the NEW Plan, but not for the frozen OLD Plan.

        Reply

        • Posted by Anonymous on March 2, 2015 at 5:30 pm

          TL many currently enrolled NJABP employees have frozen PERS accounts, at retirement if you choose lifetime income you receive your guaranteed benefit. You are clueless.

          Reply

          • Posted by Tough Love on March 2, 2015 at 7:56 pm

            You can’t buy a $1’s worth of guaranteed benefits with only 50 cents in hand to make that purchase. No Private Sector annuity-writer will sell you the product.

  3. Posted by Tough Love on March 2, 2015 at 4:08 am

    Quoting …

    Public Employee Retirement System (PERS)
    Current Plan: $95,314 x 25/55 x 13 = $563,219
    Cash Balance Alternative: $192,000

    Police & Fire Retirement System (PFRS)
    Current Plan: $100,000 x .7 x 16 = $1,120,000
    Cash Balance Alternative: $384,000

    Under both scenarios retirees would get about 34% of the pension value under the proposed cash balance plan that they now get with the current traditional defined benefit plan.
    ——————————————————————-
    John, your example above demonstrates what I have been saying (and often demonstrating myself) FOR YEARS, that the pensions granted NJ’s Public Sector workers are routinely 3x-4x times greater in value at retirement that those of comparably situated Private Sector workers.

    It is this extraordinary “generosity” that is the ROOT CAUSE of our pension problems … and finally someone (Christie) is stating the obvious …. that to FIX the pension problem, we must end this excessive generosity, and for all CURRENT (not just new) workers.

    With little difference in “cash pay” there is ZERO justification for the multiples greater pensions and benefits.

    And fixing the “benefits” side (meaning retiree healthcare) should rightfully mean reducing it to almost ZERO, because ZERO is typically the value of any currently accruing employer-sponsored Private Sector retiree healthcare benefits.

    Reply

  4. John,maybe you know the answer for this. My sister has 21 years in PFRS. If this goes through what is the difference from what she would get with 25 years to what she would get with this for the remaining 4 years of the cash balance plan plus her 21 years earned already. Any idea.

    Reply

    • Your sister is why companies went to cash balance plans in the 1990s. People in a traditional defined benefit plan earn massive acccruals the closer they are to retirement whereas a cash balance does not have age as a factor in benefits. That’s why IBM punt in their cash balance plan that sparked those nondiscrimination lawsuits that eventually worked out that IBM could do it. The benefits accrued through 21 years should be safe but there would not be further accruals or the increases from having higher salaries. Realistically though she will never see that full benefit anyway.

      Reply

    • Posted by Tough Love on March 3, 2015 at 1:00 am

      A rough workup……….

      With 25 years (and a 65% pension) …. likely with a Lump sum value of about 1.5 MM assuming retirement about age 55 after 25 years.

      With 21 years (& frozen) the DB will likely be 25-30% LESS valuable. And using the midpoint (27.5%), that drop of 0.275 x $1.5M = $412,500

      The new Cash Balance pension would give with (with 4% employee and 8% State %-of-pay contributions and interest crediting of 5%, and assuming a level annual salary of $110K over the 4 years) would accumulate to about $58K at the end of the 4-th year..

      Summary:

      Old DB Plan for all 25 years: … $1,500,000

      Old Plan for 21 years and new CB Plan for 4 years ……… ($1,500,000-$412,500)+$58,000= $1,145, 500

      Reply

      • TL- So your saying even with the change it would still be a pension of roughly 1.1 million dollars in value. Am I wrong ?

        Reply

        • Posted by Tough Love on March 3, 2015 at 1:40 am

          My $1.5 Million above assumed the COLAs are reinstated, so if they are reinstated, my $1.145 M est is likely within +or- $100K (this was a “rough” est and I don’t know actual age, salary, add-ons into pensionable comp, etc. etc.).

          If the COLAs are NOT reinstated, the $1.145MM will likely drop by about 25%. as COLAs, while a very valuable benefit to ALL retirees, are of greater value to those who retire at very young ages, as do police.

          Reply

      • Posted by Tough Love on March 3, 2015 at 1:31 am

        Just FYI ……… My $1.5 Million above assumed the COLAs are reinstated

        Reply

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