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

State and Local Pensions: Separating Myth from Fact

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State and Local Pensions: Separating Myth from Fact. 2008 EARN Conference December 10, 2008 – Las Vegas, NV Beth Almeida Executive Director. Defined Benefit Contributions pooled in a common trust Investments made by professionals/trustees - PowerPoint PPT Presentation

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Page 1: State and Local Pensions: Separating Myth from Fact

State and Local Pensions: Separating Myth from Fact

2008 EARN ConferenceDecember 10, 2008 – Las Vegas, NV

Beth Almeida Executive Director

Page 2: State and Local Pensions: Separating Myth from Fact

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

Page 3: State and Local Pensions: Separating Myth from Fact

Private Sector DB to DC Transition

Trends in DB and DC Plan Participation

0%

10%

20%

30%

40%

50%

DC Participation

DB Participation

Page 4: State and Local Pensions: Separating Myth from Fact

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

Page 5: State and Local Pensions: Separating Myth from Fact

Growing Retirement Risks

Percent of Households Aged 51-61 At Risk of Being Unable to Sustain Pre-retirement Standard of Living

19%

32%

0%

10%

20%

30%

40%

50%

1992 2004Source: Munnell, Webb and Golub-Sass. 2007. “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No. 7-11. Center for Retirement Research, Boston College.

Page 6: State and Local Pensions: Separating Myth from Fact

Growing Retirement Risks

Percent of Households "At Risk" by Birth Cohort, 2004

35%

44%49%

0%

10%

20%

30%

40%

50%

Early Boomers Late Boomers Gen XersSource: Munnell, Webb and Golub-Sass. 2007. “Is There Really a Retirement Savings Crisis? An NRRI Analysis” Issue in Brief, No. 7-11. Center for Retirement Research, Boston College.

Page 7: State and Local Pensions: Separating Myth from Fact

Public Employees Far More Likely to Have DB Pensions

Retirement Plan Coverage by Sector for Covered Workers

80%

10%

14%

64%

6%26%

0%

20%

40%

60%

80%

100%

State & Local Private Sector

Both

DC Only

DB Only

Source: Munnell and Soto. 2007. “State and Local Pensions are Different from Private Plans” SLP-1. Center for Retirement Research, Boston College.

Page 8: State and Local Pensions: Separating Myth from Fact

Proposals Have Emerged in Some States to Dismantle Public Pensions

Page 9: State and Local Pensions: Separating Myth from Fact

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

Page 10: State and Local Pensions: Separating Myth from Fact
Page 11: State and Local Pensions: Separating Myth from Fact

Cost of DB and DC Plan as % of Payroll

12.5% 22.9%0%

5%

10%

15%

20%

25%

DB Plan DC Plan

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 Fees46% Savings

Page 12: State and Local Pensions: Separating Myth from Fact

Required Assets per Employee at Age 62

$354,962

$549,903

$0

$100,000

$200,000

$300,000

$400,000

$500,000

$600,000

DB Plan DC Plan

DB Plan Can Do More with Less

Page 13: State and Local Pensions: Separating Myth from Fact

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

Page 14: State and Local Pensions: Separating Myth from Fact

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 ….

Page 15: State and Local Pensions: Separating Myth from Fact
Page 16: State and Local Pensions: Separating Myth from Fact

In It for the Long HaulReport 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

Page 17: State and Local Pensions: Separating Myth from Fact

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

Page 18: State and Local Pensions: Separating Myth from Fact

www.nirsonline.org

Page 19: State and Local Pensions: Separating Myth from Fact

Questions?

Page 20: State and Local Pensions: Separating Myth from Fact

State and Local Pensions: Separating Myths from Fact

2008 EARN ConferenceDecember 10, 2008 – Las Vegas, NV

Beth Almeida Executive Director