Public Employee Pension Plans Steven Kreisberg Steven Kreisberg Collective Bargaining Director Collective Bargaining DirectorAFSCME 1

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 2

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 3

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 4

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

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 6

DB Plan Funding: How Much is Needed Today? 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) 7

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 8

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

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

11 Source: U.S. Census Bureau

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“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

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

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: 19