CT News Junkie

A Connecticut news site that understands the usual media offerings just…aren’t…enough.

OP-ED: Defending Defined Benefit Plans

by | Apr 5, 2010 7:03am () Comments | Commenting has expired | Share
Posted to: Opinion

These days the media rely on sensationalism to sell. Editors and publishers assume the public won’t pick up a paper or click on a story without headlines like, ‘Amazing Bat Boy’ and ‘Starlet to Wed.’

Maybe that’s why, in my opinion, the not-so-sexy truth about state employee pensions and their history isn’t being told.

That doesn’t mean that the background isn’t vital. It is, and the facts must be presented. What the media and the general public need is a historical perspective on how and why pensions work for public service workers and taxpayers.

A recent report claiming that Connecticut’s pension plan ranks as the fifth-worst in the nation has fueled much of the latest sensationalism. The report cited a $9 billion increase since 2000 in the total liability of the state employee pension fund, when in fact it is almost half that number.

The inflated figure includes the Teachers’ Retirement System fund, which does not cover retired state employees, and which is not negotiated. The teachers’ pension was in such bad shape that the legislature created a constitutional funding obligation three years ago. It serves as an example of the need for collective bargaining and forced funding of pension plans.

Since its first-ever agreement with its unionized workforce on pensions in 1981, Connecticut has been fully funding the normal costs of the fund. Only twice over the past 29 years have payments for past liabilities been deferred, in each case to help weather major economic crises.

Since we began collective bargaining nearly 30 years ago, our unions have pressed politicians to make the normal costs as well as payments towards the past unfunded liability. Before 1981, politicians kept grabbing from Peter to pay Paul when they were unable to balance their budgets. Our unions knew this was an unwise funding method, and insisted it be changed.

Some have argued that State workers’ benefits are too generous and have become unaffordable. The reality is that 25 years ago union negotiations produced changes so that the cost of pensions for employees hired after 1984 is about 7 percent of payroll, typical of many large corporations. Changes negotiated in 1997 further reduced costs, so that pension costs less are than 4.7 percent of payroll for employees hired in the past 13 years, far less than many large corporations pay.

In 1984, we instituted reforms advocated by a recent Pew Research Center study such as fully funding the pension obligation every year. The reality is that State workers already had a pension plan that is reasonable by all measures.

Connecticut is simply paying now for the damage created by five decades of politicians who could not show restraint or fiscal foresight.

But what about moving State workers to a defined contribution plan, like a 401(k) savings account, as some candidates have proposed, and as some private sector businesses have already done to their employees?

Because switching to this type of savings plan today would not solve the problems created in the past. Taxpayers would still be on the hook for the liability created primarily by not funding the pension plan before it was negotiated with the unions.

And these types of savings plans would create future problems. They have higher administrative costs because they cannot compete on the economies of scale that defined benefit plans offer, so they actually produce less benefits per dollar invested. That’s a foolish waste of taxpayer money.

Economic instability is another reason to steer clear of these types of savings plans. One only needs to see how recent market volatility has crushed workers with 401(k)s and the ripple effect it has had on the entire economy. Defined benefit plans work because large employers like the state can handle the ups and downs of the market, even when individual workers cannot.

Defined benefit plans work just like Social Security, in that they are stable and predictable sources of income for seniors. The U.S. Census Bureau reported that for every $1 that taxpayers invest public plans, an additional $3 is re-invested back into the economy. Connecticut’s small businesses and local municipalities desperately need that influx of cash flow.

Seniors should not have to rely on being lucky enough to retire when the stock market is up, or unlucky if they do when it’s down. The bottom line is that they shouldn’t have to gamble with their golden years, or leave us as taxpayers to foot the bill if they make the wrong roll of the dice.

Simply put, there’s no comparison when it comes to defined benefit and defined contribution plans. In a 2008 report by the National Institute of Retirement Security called “Better Bang for the Buck,” the authors found that a traditional pension costs an average of 12.5 percent of payroll while a comparable 401(k) costs almost 23 percent.

Sometimes the facts aren’t as sexy as editors like, but they sure are convincing. These numbers don’t lie.

Catherine Osten is a correctional lieutenant with 19 years of service in the Connecticut Department of Correction and is President of CSEA/SEIU Local 2001, one of the thirteen unions in the State Employee Bargaining Agent Coalition (SEBAC).

Share this story with others.

Share | |

Comments

(15) Archived Comments

posted by: realitycheck | April 5, 2010  9:34am

OMG…are you kidding me?  The state can weather the storm? Thats your arguement for this taxpayer funded the black hole?...I’m curious, where do you think the money in these defined plans gets invested, you don’t think it goes up and down with the market?  What your not saying is when it goes down, WE the taxpayers make up the diffrence to help YOU the entitled worker make up the shortfall in the plan.  Thats what you mean by weather the storm.  So its actually OK to you that the 3 million tax payers MAKE UP the shortfall in the union plans with money from our retirement then…in this case paid in the form of hire taxes and service fees?...The bottom line here is this, the “real world” companies that you talk about spending 7% don’t exsist anymore…they have all switched to 401’s its time the state does too.

PS: If you want less flack on this lets have the Leg pass a law that retroactivly strips overtime provisions from union pensions…this little union xmas gift allows late career employees to run up there pensions artificially and costs taxpayers a $100,000 grand in pension for an employeee that never earned over $70,000 in base pay…....no more double dipping by retiring and coming back as a TEMP worker…heck even better….no more working at all…....how about we reduce your pension by that amount just like social security.  Imagine how many jobs would open up then ahye.

posted by: one-mans-voice | April 5, 2010  5:32pm

A smart person once said “Statistics are like a bikini, what they reveal is interesting but what they conceal is even more so”

To put the report referenced in this article in perspective take a look at who provides funding for the organization that produced it:

http://www.nirsonline.org/index.php?option=com_content&task=view&id=310&Itemid=97

I’ll give you a sample:

American Federation of Teachers Staff Pension Plan

CalPERS

CalSTRS

Charlotte Firefighters’ Retirement System

Chicago Teachers’ Pension Fund

Colorado PERA

Contra Costa County Employees’ Retirement Association

CWA/ITU Negotiated Pension Plan

Delaware Public Employees’ Retirement System

Duluth Teachers’ Retirement Fund Association

Denver Public Schools Retirement System

District of Columbia Retirement Board

Employees’ Retirement System of Georgia

Employees Retirement System of Rhode Island

Employees’ Retirement System of the State of Hawaii

IAM National Pension Fund

IAMAW Grand Lodge Pension Plan

Illinois Municipal Retirement Fund

Iowa Public Employees’ Retirement System

Jacksonville Police and Fire Pension Fund

Kansas Public Employees Retirement System.

My suggestion is that the author of this article stick to what she is good at and leave such complicated matters to the professionals.

posted by: Brian Parker | April 5, 2010  6:28pm

Brian Parker

Honest to goodness, I’m trying to find the message here. Is it DBs are better because…
I’m stuck at the end of that sentence.

DB plans place the investment risk to the sponsor (State or Company) whereas the PS plan place that risk on the account holder. Either way, the risk is still there. In a DB plan (theoretically) the accounting and actuarial expenses reduce the monies allocated to the corpus. PS plan are less expensive to administer for the company and leave more room for matching contributions.

In a down market a company doesn’t want a DB plan.

In an up market an employee wants a PS plan.

Tell me again what the thesis here is?

posted by: ChubbChubb | April 5, 2010  7:03pm

There is literally NO WAY 401ks take 23% of an average payroll.  Assuming max benefit selected by each employee and assuming each company matched 100% and assuming the very high end of administrative costs there is literally no way this even approaches the bottom rung of *median* salary.

This might be the worst, Ill-researched “article” that I’ve ever read.

posted by: CT Jim | April 6, 2010  5:56am

The author is absolutly correct here.So in a defined contribution plan would the state have been able to withhold $100 million this year to balance the budget? NO WAY.
Would they have been able to do it in years past? NO WAY!
Some states that went to these defined contribution plans have since reverted BACK to defined benifit.
In the private sector I worked for a company for over 20 years with a defined benifit plan and the company almost listened to some Wall Street hack and reverted to a matching 401K, they did a cost analyisis and found out that they would have to match 6% a year per employee when their defined benifit plan was what they called FULLY FUNDED and the companie hadn’t put 10 cents in it for 8 years and the size of the plan created enough profits so the co. didnt have to for years to come.
With General Motors their defined benifit plan had billions in it and the company used the plan to build a plant in Tennesee that the union said was OK with them.
The onlything that destroyed them was retiree HEALTH CARE benifits not the defined plan which still to this day has billions in it and over 400,000 retirees!
With those larger plans your able to move money into areas where the smaller 401Ks can’t go. Also 401K’s are natorious for FEEING their plans to death.
401k’s become 201 k’s while the brokers get rich.
NO THANK YOU!

posted by: CT Jim | April 6, 2010  6:37am

One other thing is we have a $18 billion bi-annual budget give or take abillion, if $10 billion of that is payroll and I’m probably a little short that means the states contribution would be $600 million bi-annually.
And seeing that the state is re-negging on this years $100 million contribution this year that leaves we the taxpayers $500 million short.
How is this a SAViNGS???!!!
So they pay $100 million a year now but would go to $300 million a year in a defined contribution plan???
Who makes out here???
Fairfield county hedgefund managers???!!!
Enough!
This is nothing short of the emperor has not CLOTHES!!!
No MORE MONEY for WALL STREET!!
We need money on MAIN STREET!
Also nobody seems to have a problem when our illustrious governor moves a $30,000 a year legislator into a $139,000 a year job at DPUC so they can cash out on the state pension at the rate of almost $100,000 a YEAR!!!
Wheres the outrage here.

posted by: City Hall Watch | April 6, 2010  9:19am

DB plans are always better for the employee. Where’s the news? The only aspect of this article I agree with is fully funding pensions. If city and the state did that, employees would have fewer benefits, and taxpayers would have fewer employees. New Haven only budgets what they have to pay out and the state doesn’t do much better if at all. As for the rest of this piece. It’s union propaganda.

posted by: GoatBoyPHD | April 8, 2010  6:27pm

GoatBoyPHD

Nice article but defined contribution plans w/ matching 5% along with HealthCare policies from the ObamaCare Exchanges are the future of State government.

With ObamaCare there won’t be any need to fund Heath benefits once a person leaves their job.

posted by: CT Jim | April 9, 2010  6:44am

gee goatee, Don’t see a thing that connects the Health Care for all legislation with defined contribution plans at all.
On the contrary it would enhance the defined benifit plans because states wouldn’t have to skip payments on the pension to pay for healthcare.
THANK YOU PRESIDENT OBAMA, and Thank you NANCY PILOSI!!!
the defined benifit plan is not only better but is definetly cheaper when you look it cost the state $100 million per for defined benifit and if every state employee got into a defined contribution plan at 5% it would cost between $500 and $700 million per.
Where do we get the extra 1/2 billon a YEAR???!!

posted by: Brian Parker | April 9, 2010  8:48am

Brian Parker

CTJim:
Not that I really care to debate this, but I can’t let that statement “defined benifit [sic] plan is not only better but is definetly [sic]cheaper” just sit out there.
There not.
It’s an industry fact.
Don’t take my word for it. Call up ING or John Hancock or any of the many, many TPA firms.
Business owners choose the DB plans because they, personally, have a bunch of cash in the business and want to sock it away on a tax advantaged basis.

Respectfully, big entities need a blend of plan. DB, 401(k)s, 403(b)s, 457s - whatever. But the PS model is, by design, cheaper. It’s simply why it exists. It get that way by shifting risk, which numerous people above have explained.

posted by: CT Jim | April 9, 2010  12:31pm

I noticed that you ventured to insurance companies, those same companies that view defined benifit as more of a “single payer” plan.
Really Sunday you need to stop with the insurance java.
in my earlier post you will see I mentioned GM and another fortune 500 company here in CT that have defined benifit plans and who flirted with the defined cotribution plans out there. The only one who make money on the defined contribution plan is the stock brokers and hedge fund managers.
Feel free to debate all you want but remember just being there for the debate doesnt mean your right.
and the defined contribution plan does shift the risk for sure right to the backs of the workers who are required to make the company more money on less resources and less time than ever before.
Great! so be it let the worker spend their first lets say 3 hours of the work day managing their 401k which has now become a 201k then make the company money.
You also haven’t said where the state was going to get the extra $500 million a year to contribute.
And in down times will the state be able to suspend payments to the plan like the private companies have done?
And of those that have suspended their payments to the workers 401ks, how many have restarted?
You people try to simplify very complex situations and make matters worse.

posted by: ChubbChubb | April 9, 2010  1:01pm

There is not a single human in the free world who spends 3 hours a day managing 401ks

posted by: Brian Parker | April 9, 2010  1:55pm

Brian Parker

LOL, Oh Game On!
I’ll chat about it Sunday.
(Do people really call stock brokers to manage their 401(k)s?)

posted by: CT Jim | April 9, 2010  2:09pm

I know thats why they are WORTHLESS LOL

posted by: CT Jim | April 9, 2010  6:05pm

Sunday, based on them being 201ks now they should have LOL. Why should workers gamble with their retirement if they don’t have to? This is just Wall street taking a situation they caused and making a cash grab based on it. I would fight till the end of time before I let some pencil neck on wallstreet gamble with my life and guess what? He gets paid win or lose!

Social Networks We Use

Connecticut Network

Categories

Our Partners

Sponsored Messages