Pension cost claims built on multiple assumptions

Surprise, surprise.

A consulting firm that has done studies for years for the Public Employees Retirement System of Nevada is telling the retirement system’s board, which is made of current and retired state workers covered by the system, that it will be costly to switch from the lucrative defined benefit system to a less generous defined contribution system.

Ed Vogel's story today explains the difference succinctly:

"Under defined-contribution plans, which are popular in private industry, employers pay a fixed percentage of an employee's income into a retirement plan, often into a 401(k) plan. What employees receive in retirement benefits depends on how well their investments do. Under defined-benefit plans, set payments are guaranteed the retiree until death."

The Segal Co.’s study is built on assumption after assumption, the first of which is that the state would do the responsible thing and immediately properly fund an actuarially sound level of contributions for what essentially has been a Ponzi scheme already underfunded by $10 billion.

The study estimates the public employers (the taxpayers) would have to pony up more than a billion dollars in the next two years, while the public employees would have to deduct from their (taxpayer funded) salaries about $175 million. This is because new employees would not be paying into the system, meaning sustaining its currently promised benefits would cost more. That’s how Bernie Madoff’s scheme collapsed. There weren’t enough new investors to cover the payouts to the older ones.

The study assumes the taxpayers will immediately pick up the currently promised amounts. There is no suggestion that the employees might have to pick up a greater share of their retirement. There is no thought that the state and local governments could do what other states have done for years, and that is simply refuse to fully fund the system — let the unfunded liability grow.

The study pointedly spells out the difference between the public worker benefits and those in the private sector on Social Security:

“Someone who works 35 years in Social Security covered employment and retires at Social Security Normal Retirement Age (66 to 67) can typically expect a benefit of 25% to 40% of their highest salary. This percent depends on how high the person’s salary was. Social Security replaces a higher percentage of earnings for those earning a lower salary. Someone earning $30,000 annually at retirement in today’s dollars can expect a Social Security benefit of approximately 40% of their final salary, while someone earning $90,000 would only receive approximately 25%.

“A PERS DB (defined benefit) Regular employee, on the other hand, who works in PERS covered employment for about 30 years and retires at full retirement eligibility age (60 or 62) will earn a benefit of 75% of compensation. The Normal Cost contribution requirement for PERS Regular employees along with administrative expenses is 16.24% to 17.13% of compensation. For the same cost as Social Security, PERS could fund a benefit of over 50% of compensation payable five years earlier than Social Security.”

The study also assumes the public worker retirement plan is a “contract right” in perpetuity under “applicable case law,” meaning the taxpayers could not demand their employees pick up a greater share of their retirement.

Case law is determined by judges, who are, you guessed it, covered by PERS. The retirement benefits are determined by lawmakers and local boards, councils and commission, that are, you guessed it, covered by PERS. The executive branch, including the governor and attorney general, are, yep, covered by PERS.

No one knows what can be done until someone tries.

There is one advantage to a defined contribution plan that is seldom mentioned. There is, by definition, never an unfunded liability. The benefit is also portable. An employee can leave and take it with them.

A Las Vegas Chamber of Commerce state-by-state study of 2008 pensions called Nevada's public pensions "among the nation's most favorable public employee pensions." It found a 30-year employee retiring with an annual salary of $50,000 would receive a $37,380-a-year pension for the rest of his life.

As one union member observed, states have kicked this can down the road for so long the can is now a 55-gallon drum.