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Public Employee Pension Plans

Public Employee Pension Plans. Steven Kreisberg Collective Bargaining Director AFSCME. Scrutiny of public sector compensation. Competing studies, some claim public sector workers are overpaid or have overly generous benefits

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Public Employee Pension Plans

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  1. Public Employee Pension Plans Steven Kreisberg Collective Bargaining Director AFSCME

  2. Scrutiny of public sector compensation • Competing studies, some claim public sector workers are overpaid or have overly generous benefits • Fail to account for education (public employees more likely to have a college degree or highly specialized training) • Public sector workers tend to have greater seniority • Directly responsible for health and safety in community

  3. Public sector compensation • National Institute on Retirement Security (Bender/Heywood) study: • Salaries of state and local employees are 11% lower than those with similar skills and abilities in private sector • Benefits make up larger share of compensation for public employees – DB Pensions and Health Benefits • Total compensation about 7% lower in public sector • Other studies by Keefe; Schmitt; Munnell www.nirsonline.org

  4. Defined Benefit Plan Fast Facts • Over 2,600 public sector pension plans in the U.S. • 15 million active employees • 7 million retirees • Public plans hold $2.9 trillion in assets • Funded ratio of about 70 percent • Funded at 86 percent prior to historic 2008 losses • Average annual pension for an AFSCME member is about $19,000; average pay less than $45,000 • 30,000 private sector DB plans – down from high of 112,000

  5. Percentage of Employees in Defined Benefit Plans, 1980 - 2010 Source: U.S. DOL National Compensation Survey, State and Local Government and Medium and Large Private Employers

  6. Defined Benefit Plans – Typical Formula • Years of service = 25 • Service credit multiplier = 2% • Final average salary = $40,000 • Annual Benefit = $20,000 • Specific eligibility age – reductions for “early” retirement • Employees can plan for retirement and employers can efficiently manage workforce

  7. DB Plan Funding: How Much is Needed Today? • Pre-funding a benefit that is decades away from payment requires use of many assumptions • Theory: the cost of the plan is spread out over each participant’s career to provide payments over a lifetime • Normal cost: actuarial present value of benefits earned in the current year (usually percentage of payroll)

  8. Key Actuarial Assumptions • Investment returns • Salary: projecting an individual’s pay increases • Withdrawal: length of service and turnover • Age and service at retirement • Inflation: COLAs • Longevity

  9. Funding – Annual required Contribution • Normal Cost (typically 9% to 14% of payroll) Plus • Payment towards Unfunded Liability (amortized over 20 to 30 years)

  10. Median annual public pension fund investment returns – periods ending December 31, 2010 Source: Callan Associates and NASRA

  11. Source: U.S. Census Bureau

  12. “Reforms” Proposed for Many Plans • Raise employee contributions • Reduce multiplier • Raise retirement age/years of service • Lower or eliminate COLA • Put new hires in defined contribution plans

  13. Defined Contribution Plan • Designed to supplement – not replace – a traditional pension plan • As a supplement: savings help maintain standard of living in retirement • As a replacement: how much is needed?

  14. Defined Contribution Plans Put Individuals at Risk • How much to contribute • Asset allocation and reallocation • Investment returns • When to “retire” • Longevity

  15. Defined Contribution Plan Data • EBRI reports median 401(k) balance of $59,381 at end of 2009 • Wells Fargo reports that average American in their 50s has $29,000 for retirement • Would produce $190/month over 20 years • Americans estimate they will need $300,000 • Cumulative retirement savings deficit = $8 trillion

  16. Source: “A Better Bang for the Buck,” National Institute on Retirement Security. Amount necessary, when coupled with Social Security, to provide adequate retirement income.

  17. Key Facts • Pension benefits are modest, but meaningful • Employees typically contribute 5% to 10% of pay • Some employees are not in Social Security (25% to 30% are excluded) • Pension costs are a small part of total government expenditures – challenge in greater in cities • Conversion to DC (401k-style) plans is ineffective

  18. More pension information, including state plan fact sheets, available at: http://www.afscme.org/issues/75.cfm

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