State and Local Pensions: Separating Myth from Fact 2008 EARN Conference December 10, 2008 – Las Vegas, NV Beth Almeida Executive Director

Defined Benefit Pensions vs. Defined Contribution Accounts Defined Benefit Contributions pooled in a common trust Investments made by professionals/trustees At retirement, regular monthly pension payments for life Defined Contribution Contributions made to an “individual account” Investments are employee-directed At retirement, account balance is yours – annuity options are rare

Private Sector DB to DC Transition DC Participation DB Participation

Retirement Readiness – What Difference Does a Pension Make? DB plans provide … –Secure and adequate retirement income –Those without pensions are more likely to be at risk in retirement

Growing Retirement Risks Source: Munnell, Webb and Golub-Sass “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No Center for Retirement Research, Boston College.

Growing Retirement Risks Source: Munnell, Webb and Golub-Sass “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No Center for Retirement Research, Boston College.

Public Employees Far More Likely to Have DB Pensions Source: Munnell and Soto “State and Local Pensions are Different from Private Plans” SLP-1. Center for Retirement Research, Boston College.

Proposals Have Emerged in Some States to Dismantle Public Pensions

Misperceptions about Public Pensions Relative cost of DB plans vs DC plans Consequences of “freezing” DB plans How public pension plans are funded and how they invest

DB Plan Can Deliver Same Benefit at About Half the Cost of DC Plan DB Cost No Longevity Risk Pooling Less Balanced Portfolio Lower Returns/Higher Fees 46% Savings

DB Plan Can Do More with Less

Look Before You Leap: Unintended Consequences of Pension Freezes By itself, freezing plan does nothing to close funding shortfall Freezing plan undermines the economics of the plan by starving it of new entrants Because of accounting regs, plan costs can actually increase

Funding of Public Pensions “Most state and local governments are on track toward full funding of their pension plans” (GAO - Sept 2007) “The funded status of state and local government pensions overall is reasonably sound” (GAO - Jan 2008) Still, investment losses will create pressures in coming years ….

In It for the Long Haul Report Conclusions Public plans are prudent investors –Rebalance in response to price swings –Systematically follow practices of performance leaders –Avoid excessive risk-taking, moral hazard and employer conflicts If anything, the last crisis made public pension plans more cautious, not less cautious

Separating out Myth from Fact Public pension plans meet twin goals of … –Retirement security for employees/retirees –Fiscal responsibility for taxpayers Restoring retirement security will require “raising the bottom,” not racing to the bottom

Questions?

State and Local Pensions: Separating Myths from Fact 2008 EARN Conference December 10, 2008 – Las Vegas, NV Beth Almeida Executive Director