Ron Snell National Conference of State Legislatures Pensions Issues and State Legislation in 2010 Denver University Strategic Issues Panel on the Future of State Government November 4, 2010
Feb 24, 2016
Ron Sne l lNat iona l Conference o f State Leg is latures
Pensions Issues and State Legislation in 2010
Denver University Strategic Issues Panel on the Future of State
GovernmentNovember 4, 2010
Public and Private Pensions in the US
Two important differences:
Public employees are much more likely to be covered by any kind of employer-sponsored retirement benefit than private-sector employees.
Public employees are much more likely to have a guaranteed lifetime retirement income from their employer than private -sector workers.
Access to Retirement Plans: All Employees
Private Sector Public Sector0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
65%
90%
50%
85%
Access to Retirement Plan Participation in Plan
Access to Retirement Plans by Compensation
Lowest Paid 25% Highest Paid 25%0%
10%
20%
30%
40%
50%
60%
70%
80%
90%
100%
69%
94%
20%
75%
Public Sector Private Sector
Perc
ent
Part
icip
atin
g
Basic U.S. Pension Plans
Two kinds of retirement plans in the US: 1. Traditional Defined Benefit (DB):
Retired person receives a lifetime, guaranteed annuity (annual pension) based on earnings and length of employment. Increasingly limited to state and local government, but still found among large private sector employers.
2. Defined Contribution (DC) . Often called 401(k): Employee builds up a retirement account, usually with
matching employer contributions. At retirement employee receives a lump sum or an annuity. Predominates in the private sector.
Basic U.S. Pension Policy
A major difference between DB and DC plans is who is responsible for the retired person's pension.
For DB plans, the employer. Contributions go into a trust fund. It is invested. Benefits are paid from the trust fund and are a legal obligation of the employer to the retired person.
For 401(k) plans, the employee. Employer's legal obligation is to make contributions to the account.
Participation in Retirement Plans
State/Local Govt Private Sector0
10
20
30
40
50
60
70
80
90
100
Defined Benefit Plan Defined Contribution Plan
Perc
ent
of A
ll W
orke
rs
Bureau of Labor Statistics, March 2009
Public and Private Pensions
Percent of Employees with a Traditional (Defined Benefit) Retirement Plan
1
2
3
0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%
Full Time State/Local Government: 87%
Employees in Large Companies: 46%
All Private Sector Employees: 20%
Bureau of Labor Statistics, March 2009
Public Employees Contribute to Retirement Plans
Public Employee Contribution Rates, 2009
5% or Less More than 5% Noncontributory Rate Varies0%
10%
20%
30%
40%
50%
60%
Wisconsin Legislative Council, 2010
Public Pension Fund Sources of Revenue1982-2009
INVESTMENT EARNINGS: 60%
EMPLOYER CONTRIBUTIONS26.9%
EMPLOYEECONTRIBUTIONS 13.1%
National Association of State Retirement Administrators; U.S. Bureau of the Census
126 Large state and local government plans.
Colorado PERA Assets vs. Liabilities
Market Value as of December 31 for each year
1991
1992
1993
1994
1995
1996
1997
1998
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
$0.0
$10.0
$20.0
$30.0
$40.0
$50.0
$60.0
Assets Liabilities
In B
illio
ns
11
Source: Colorado Public Employee Retirement Association, 2010
Assets of State and Local Government Retirement Plans, 2003-2010 estimates
03 04 05 06 07 08 09 10
$2.35
$2.58$2.72
$3.09$3.20
$2.32
$2.69 $2.72
Trillion
**est. for 9/30/10Years Ended
National Association of State Retirement Administrators; U.S. Federal Reserve Bank
Public Plan Unfunded Liabilities, 2001-2013
Estimates for 126 Large State and Local Plans
2001 2003 2005 2007 2009 2011 2013$0
$200
$400
$600
$800
$1,000
$1,200
$1,400
Bill
ions
Boston College Center for Retirement Research Oct. 2010
What's Been Happening
More states have enacted significant retirement legislation in 2010 than in any other year in memory.
This reflects: Concerns about the viability of retirement plan
benefits and funding that date to the 2001 recession.
Severe investment losses in the recent recession.
State fiscal conditions.
Major Pensions Legislation in 2010: All Topics
20 states represented
Major Pensions Legislation 2005- 2010: All Topics
30 states represented
Increase in Employee Contributions, 2010
Active Employees (7)Future Hires Only 4)
MO, UT, VA, WY imposed contributions where plans had been noncontributory.
Higher Age & Service Requirement for Normal Retirement, 2010
10 states represented
Longer Period for Calculation of Final Average Salary, 2010
8 states represented
Reduced Post-Retirement Benefit Increase, 2010
People Already Retired (3)Future Hires Only (4)
Some Active Employees (1)
Trends in 2010
Reduced benefits for new employees with the same service and compensation.
Higher employee contributions as a percent of salary.
More restrictions on retirement before normal age and on retired people returning to covered service
Most changes occur within the framework of defined benefit (DB) plans.
Replacement of DB plans with hybrid plans in Michigan and Utah.
Possible Consequences for Personnel Management in Government
How will these changes affect future state employees and employment? Are public employees being made a
scapegoat for state fiscal problems? Effect on employees' morale. Issue of disparity of treatment. Impact on recruitment of new employees.
Structural Change in Michigan in 2010
Michigan School Employees Retirement System Includes K-12 teachers statewide. Replaces a defined benefit (DB) plan for employees hired
after July 1, 2010 with a hybrid plan: A DB with higher age and service requirements and a
lower benefit than the former plan. FAS based on 5 years (3 years in the closed plan).
Plus an opt-out defined contribution (401k) plan, with an employer match (4-year vesting) to employee contributions. Within limits, school districts may negotiate levels of employee contributions and employer match.
No post-retirement COLA for the DB portion.
Structural Change in Utah in 2010
The Utah Legislature also replaced a traditional defined benefit plan with an alternative structure in 2010.
It provided choice for employees: A defined contribution plan fully funded by
employers with a contribution of 10% of salary or A plan that combines features of a defined
contribution and a defined benefit plan.
Structural Change in Utah in 2010
The Utah hybrid plan: For DB component, employers will contribute 10% of
salary. When the 10% is insufficient to meet the actuarially
required contribution to meet full funding, employees will make up the difference.
When the 10% is more than is required to keep the plan actuarially sound, the difference will be deposited in an employee 401(k) account.
Employees may but are not required to contribute to the 401(k).
DB benefit available at 65/4; 60/20; 62/10; any age with 35 years of service. Five-year FAS; DB benefit = 1.5% FAS for each year of service (presently 3-year FAS, 2% factor)
This report is based on NCSL's annual report on state pensions and retirement legislation.
The 2010 report, covering legislation enacted through October 15, 2010, is available on the NCSL website at
http://www.ncsl.org/?tabid=20836
For further information:Ron Snell -- [email protected]