Fixing NJ Pensions

Scott Shepard, author of a new study on New Jersey pensions published by the Mercatus Center, had an opinion piece in nj.com where he proposes these “painful fixes”:

Next comes the harder part. The state should then figure out — using theoretically sound rates of expected investment return and without the all-too-common accounting gimmicks — exactly how big the rest of the bill is for work already performed.

If it’s too big to realistically pay, then New Jersey will need — finally — to do the politically ugly but financially necessary thing: start cutting already-earned pension benefits.

There are relatively equitable ways to do this. Set an absolute cap of perhaps $100,000 or $125,000 per year, indexed to inflation, on benefit payments. Cut benefits that pay current or future retirees more than they earned in base salary while working. Reduce “spiked” benefits. Do this while completely safeguarding benefits below a certain comfortable-retirement threshold.

There is precedent for New Jersey cutting benefits arbitrarily and illegally so applying a cap is a logical next step. However, based on updated retiree payout data through June, 2018, Mr. Shepard’s suggested cuts will not be nearly enough.

Retiree data downloaded from the state website, after eliminating those with $0 benefits, shows 335,940 retirees getting annualized pensions of $10,928,305,817.

Capping those pensions at the lesser of $100,000 or the salary used to calculate the benefit would lower annual payouts by $56,886,723 (about .5%). Hardly a blip but that is not the point. If applying a cap on benefits already accrued is allowed then the path is clear to set the cap at the level that WOULD allow plan benefits to continue – probably in range of what Social Security would pay.

 

25 responses to this post.

  1. Posted by Analyst on August 15, 2018 at 12:34 pm

    So what would happen
    If the cap was $60,000 per year ?
    This would give us a range of values of the impact . This also shows the value of actually doing analysis

    Reply

    • Posted by PS Drone on August 15, 2018 at 5:51 pm

      Max should be $60 and the benefit payments should not commence before age 66. Want to “retire” at age 55? Get a job at Dairy Queen.

      Reply

  2. Posted by Tough Love on August 15, 2018 at 12:36 pm

    WOW ………… seems like the discussion is FINALLY moving the the “necessary” direction.

    Reply

  3. Posted by skip3house on August 15, 2018 at 1:18 pm

    About time this was stated …’…without the all-too-common accounting gimmicks — exactly how big the rest of the bill is for work already performed….’….

    Reply

  4. Posted by Anonymous on August 15, 2018 at 1:58 pm

    And, although even a smaller blip, those who have accumulated COLA’s equal to or greater than their base pension ( as I said, probably not too many & certainly the $ savings are not there), they MIGHT be currently receiving a pension in excess of their working salary.

    Reply

  5. Posted by geo8rge on August 15, 2018 at 2:25 pm

    Sweeny seems to think the problem is health care spending. It might be possible to reduce health care spending and increase quality.

    Capping at pension payouts at $100k would probably mean paying higher salaries to key personnel like medical people. It might also mean higher salaries for police chiefs and similar ranks. Paying government executives upfront might be good policy but it will be more expensive immediately.

    Since the eliminating the COLA after a certain date is apparently legal, maybe eliminating the component of current pensions due to the COLA before that date is also legal. Sort of like a clawback or whoopsie.

    Reply

    • Posted by Anonymous on August 15, 2018 at 4:22 pm

      I would think suspending COLA’s could be retrospectively in addition to the prospective implemented as a result of the 2011 reforms. Based on recent NJSC rulings it shouldn’t be a problem. Your thoughts Eric?

      Reply

      • Posted by boscoe on August 15, 2018 at 10:10 pm

        I’m not Eric, but your suggestion can’t and won’t happen. Which politician do you think would even vote for this, let alone propose it? But why stop there — maybe they can try to retroactively recapture portions of workers’ salaries paid to them ten years earlier on the grounds that it caused higher pension costs?

        Reply

        • Posted by PS Drone on August 15, 2018 at 10:26 pm

          No, but I would claw back pension benefits in excess of $60K per year and/or received before age 66. Sounds rough, but the benefit schedules we tolerate now are unconscionable.

          Reply

          • Posted by boscoe on August 15, 2018 at 10:39 pm

            Merits aside, I feel safe in predicting that nothing will be enforced retroactively. It would cause a political and legal nightmare.

  6. Posted by Tough Love on August 15, 2018 at 6:56 pm

    I just read the entire 34 page Mercatus Center (George Mason University) Report linked in in this Blog. Gee, If I were to go back over just a few months of my own comments on this Blog, I would assuredly find that I mentioned and was in agreement with over 90% of the author’s observations, issues, concerns, conclusions, and recommendations.

    Just one point left out in the author’s suggested ways to REDUCE pensions for PAST service (not that his list was supposed to be all encompassing) ………..

    While he did suggest that a pension “cap” should be proportionally reduced for a shorter than full career (say working in Public Sector for only 15 years), he forgot to suggest that any “cap” should also recognize that a pension that begins at say age 55 has a value just about DOUBLE the identical pension that begins at age 65 (the age at which the lucky few Private Sector workers who still get DB Pensions can typically begin collecting their pensions without an actuarial reduction). That being the case, whatever pension “cap” is established as the maximum payable at age 65 should be HALVED for pensions that begin at age 55. ………. with proportional reductions for ages in between 55 and 65 and GREATER reductions for those who retired (or will retire) before age 55.

    Reply

  7. Posted by skip3house on August 15, 2018 at 10:46 pm

    If goals are 100% funding with present funds actually existing, and future earned pension benefits YEARLY must equal all funding provided that year, NJ wins!

    Reply

    • Posted by boscoe on August 16, 2018 at 11:20 am

      The goal is not 100 percent funding with present funds actually existing. That’s why they have a provision for amortizing the unfunded accrued liability (the accumulated shortfalls) over a future fixed period. Let’s put this another way: pension entitlements are set in law. If there isn’t going to be enough money available to pay forecasted benefits, then change the law on benefit levels. That’s what’s being proposed by the Sweeney task force. Like it or not, that’s how you do things, not by watching every year to see if the Legislature has appropriated enough funds to provide for an employee’s year of service accumulation. That would be a nightmare in more than one way.

      Reply

      • Posted by skip3house on August 16, 2018 at 12:56 pm

        Constitution/law has been broken every year since Pension funding went underwater….NJ Budget not balanced, so why not bring the stories to an end by using truthful numbers?

        Reply

  8. If applying a cap on benefits already accrued is allowed then the path is clear to set the cap at the level that WOULD allow plan benefits to continue – probably in range of what Social Security would pay.
    This is a GREAT idea. The retirees who are not getting the massive pensions, say above $60K-$80K, are 100% protected. The ONLY ones getting hit will be those over that ceiling threshold, be it $80K or whatever that number is (we now know it is BELOW $100K). The ones at the bottom will not suffer any hit at all. That is a “progressive” solution. It inflicts pain, BUT only on those that who afford to take that pain, the ones at the very TOP of the food chain receiving the most in pension benefits. Very similar to the income tax; and the opposite of a regressive tax, such as the “sales tax” which hits everyone the same, killing the poor and middle class.

    GREAT IDEA! I think the best one I have seen on a solution to the funding issue. The progressive portion is what sets it apart. I love it 🙂

    Reply

    • Posted by Tough Love on August 16, 2018 at 5:25 pm

      But let;s not forget …………….

      The younger you begin to “collect” your pensions the greater it’s VALUE ……. TWICE as great at 55 vs 65. So any cap set as applicable to retirements at age 65 should be progressively REDUCED to HALF that amount for retirements at age 55.

      Reply

    • Quite a few multi-employer plans have already reduced benefits for current retirees. Can we look at some of their examples of how to make reductions somewhat fairly?
      ————————————–

      ” The ones at the bottom will not suffer any hit at all. That is a “progressive” solution. It inflicts pain, BUT only on those that who afford to take that pain, the ones at the very TOP of the food chain receiving the most in pension benefits.”

      Some people apparently don’t like to hear this, but public worker compensation is already very progressive. It is much more egalitarian than private sector compensation, not just in New Jersey and Illinois, but in virtually every state and most OECD countries.

      1) Lower paid, lower educated, unskilled public workers earn much more than they would in the private sector. Mainly due to pensions and healthcare, especially retiree healthcare.

      2) More highly, educated public workers earn much less in wages than their private sector peers, and the pensions and benefits are not sufficient to compensate for the lower wages. (Doctors, Lawyers, engineers, etc.)

      3) It follows logically (and empirically confirmed), that between these two extremes is a large group of public employees who are roughly equal in compensation to their private sector peers. Their higher pensions and benefits roughly compensate for their lower wages. (i.e. deferred compensation.)

      Something to keep in mind when looking for equitable treatment of pensions.

      Reply

      • We are all unequal, but some are more unequal than others.

        Reply

      • 1) Lower paid, lower educated, unskilled public workers earn much more than they would in the private sector. Mainly due to pensions and healthcare, especially retiree healthcare.
        Really? Unskilled GED educated, rank and file gov jobs like cop and firewhiner are making more than ANYONE in the public sector, including Doctors, Lawyers, Judges, Dentists, Nurses, even the POTUS. They are, literally, becoming MULTI-MILLIONAIRES, in less than 1 year in some cases (like new LAPD Cheif Moore). GED educated Gov employees becoming multi-millionaires. The new 1%er’s. New LAPD Chief Michael Moore pulled down $1.5 million in a one year time frame ($1.27 million DROP pay out included). It will top $2.5 million at the end of his second year, and will pay out $550K every year after. So, where in the private sector does that happen? Where unskilled Gov jobs pay out MILLIONS ? No where, that’s where:
        “$1,270,000 DROP fraud (unheard of in real life)+ $170,000 unused sick leave (unheard of in real life)= $1,440,000 in cold hard cash, + $240,00/year pension at age 53 (unheard of in real life) + $299,000/year salary ($539,000/year total) = $1,440,000 + $539,000/year pension-salary = $1,980,000/First year pay out.
        http://www.latimes.com/local/lanow/la-me-chief-drop-2018-08012-story.html

        Reply

        • Posted by PS Drone on August 17, 2018 at 12:24 pm

          But, but…he/they are only complying with agreed upon contractual terms. Heaven forbid those “terms” are ridiculous on their face.

          Reply

        • Posted by Anonymous on August 17, 2018 at 3:14 pm

          Ok got your overstated, exaggerated, the exception not the rule point. But really more than a doctor, lawyer, judge, of POTUS – even you don’t believe that unless your Trump. Speaking of which why does a billionaire real estate developer put all that aside to draw a measly POTUS salary with beneftis both defined and obscure. Indeed why does any politican do so. Ah to make America great again.

          Reply

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