Transcript Can We Afford Public Pensions? Retirement Issues 2013 National Press Foundation Washington, D.C. April 8, 2013 Diane Oakley Executive Director National Institute on Retirement Security www.nirsonline.org.

Can We Afford Public Pensions?
Retirement Issues 2013
National Press Foundation
Washington, D.C.
April 8, 2013
Diane Oakley
Executive Director
National Institute on Retirement Security
www.nirsonline.org
Overview
• State of U.S. Retirement
• Economics of Pensions
• Close Up on Public Pensions
2
The Quiet Crisis:
Retirement Deficit
• Massive wave of Baby Boomers retiring
and majority ill-prepared, especially late
boomers.
• Insufficient 401(k) savings, private
pensions disappearing, Social Security
cuts, plus increase healthcare costs.
• Half workforce has no workplace
retirement plan – women and minorities
particularly vulnerable.
• What are costs of broken system?
Financial strains on families to support
parents, pressure on public assistance,
reverting to elder poverty.
3
Shifting Retirement Infrastructure
Shifts Risk to Individuals
Private Sector Workers Participating in
Employer Based Retirement Plan
by Plan Type, 1979-2008 (all workers)
Source: DOL, PBGC and EBRI
National Retirement Risk Index ( 1983 – 2010)
Working Households at Risk of Falling Short of PreRetirement Living Standard
Source:, Center for Retirement Research at
Boston College, 20129
23 Million Americans 60+ Received DB
Income, but Boomers Trend Downward
Percent of Older Americans (60+) with DB Pension
Income, 1998, 2003, 2006 and 2010
60%
52%
52%
48%
50%
40%
43%
34%
34%
32%
30%
28%
20%
10%
0%
1998
2003
Own DB Pension
2006
2010
Own or Spouse's DB Pension
Source: The Pension Factor, Table 1.
5
What Do Americans Think
About Retirement?
6
Anxiety Not Dissipating
How concerned are you about current economic conditions affecting
your ability to achieve a secure retirement?
Source: NIRS Pensions & Retirement Security 2013
7
It’s Only Getting Harder to
Prepare for Retirement
Do you feel that – compared to today – it will be easier or harder for
Americans to prepare for retirement in the future, or will there be no
difference?
Source: NIRS Pensions & Retirement Security 2013
8
High Support for Pensions
How would you describe your overall view of a pension?
Source: NIRS Pensions & Retirement Security 2013
9
Disappearance of Pensions an
Impediment to “American Dream”
To what extent do you agree/disagree that the disappearance
of pensions has made it harder for workers to achieve the
“American Dream?”
10
Pension Bigger Employer Draw
Than 401(k) Accounts
Let’s say you’re taking a new job and considering two employers –
one offered a pension and the other a 401(k). How likely would you
be to choose the employer with the pension or 401(k)?
Source: NIRS Pensions & Retirement Security 2013
11
Economics of Pensions
Pensions are unique in that they:
• Avoid the problem of “over-saving” by pooling the longevity
risks of large numbers of individuals – resulting in a 15% cost
savings.
• Are ageless and therefore can perpetually maintain an optimally
balanced investment portfolio rather than the typical individual
strategy of down-shifting over time to a lower risk/return asset
allocation – resulting in a 5% cost savings.
• Achieve higher investment returns as compared to individual
investors because of professional asset management and lower
fees – resulting in a 26% cost savings.
12
Economics of Pensions
Economies of scale enable group pensions to provide same retirement
benefit at half the cost of individual 401(k)-type account.
DB pensions cost 46% less than DC accounts for the same benefit.
Conversely, DC system costs 83% more than DB system.
Source: NIRS, Better Bang for the Buck, 2008
13
What About Public Pensions?
Strong Position Going Into Financial Crisis
Aggregate State and Local Pension Funding Levels Assets as a
Share of Trust Fund Liabilities (percent)
Source: Center for Retirement Research at Boston College (data not provided for 1995, 1997, 1999)
14
NIRS “On The Right Track?”
Recent Reforms
• Closing a DB pension can incur
unfunded liability growth and
large transition costs.
• Substituting DB pensions with
DC accounts is inefficient.
• Most states have pursued
changes to DB plans to make
them more sustainable.
15
Aggressive Reforms In Virtually All States to
Ensure Sustainability of Public Pensions
Types of Changes Enacted
Reduced benefits for new hires
39
Employee contribution increase
29
Reduced COLA for current members
16
Employer contribution increase
(statutory)
9
0
10
20
30
Number of States
40
50
Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state.
16
States Adjusted DB Plans Rather Than
Wholesale Switch to DC Plans
Types of Changes to New Hire Benefits
Adjust existing DB plan
33
DB + DC hybrid
3
Mandatory CB (DB closed)
3
0
10
20
Number of States
30
40
Source: Author’s analysis of NCSL data. Changes affect some or all members of state-run plans in each state.
17
Example 1:
Minnesota Statewide Retirement Systems
• Medium term cost decrease;
dramatic short term cost
increase.
• Long term: DC plan less
efficient than existing DB in
cost-benefit terms
• $2.8B transition cost, mostly
from accelerated amortization
of unfunded liabilities
18
Example 2:
Texas Teachers Retirement System Study
• $11.7 billion/49% increase
in closed DB plan liability
due to a more liquid asset
allocation
• Cost comparison of
multiple plan design
options
– DC most expensive
– DB least expensive
19
Example 2 (continued):
Texas Teachers Retirement System Study
• Simulations to realistically
measure probable outcomes
for workers in DC system:
– lower returns
– higher fees
– market volatility
• Workers would have only a
50% chance of reaching 60%
of the benefit provided by the
DB plan, at the same cost.
20
Recent Reforms Projected to Work
Boston College Center for
Retirement Research:
• For most plans, reforms
“fully offset or more than offset
the impact of the financial crisis
on the sponsors’ costs.”
• Normal cost for employer will be
halved, from 8.2% to 4.5% of
payroll.
• Pension costs as a share of
state-local budgets will fall
below pre-crisis levels over long
run.
Munnell et al., Feb 2013.
21
Strong Support for Public Pensions
Because Employees Pay
To what extent do you agree/disagree that state/local employees
deserve benefits because they finance cost by contributing from every
paycheck?
Source: NIRS Pensions & Retirement Security 2013
22
American Believe Public Pension
Benefits Levels Just Right
The average retirement benefit for public workers is $2150/month. Some
may be more or less. Is that too high, low, about right?
Source: NIRS Pensions & Retirement Security 2013
23
Police/Fire Deserve Pensions to
Compensate for Risk
To what extent do you agree/disagree that police/fire have agreed to take
jobs that involve risk and therefore deserve pensions that will afford a
secure retirement?
Source: NIRS Pensions & Retirement Security 2013
24
Teachers Deserve Pensions to
Compensate for Pay
To what extent do you agree/disagree that public school teachers
deserve pension to compensate for lower pay?
Source: NIRS Pensions & Retirement Security 2013
25
Americans Want Pensions for All
To what extent do you agree/disagree that all workers, not just those
employed by state/local governments, should have a pension?
Source: NIRS Pensions & Retirement Security 2013
26
Retirement Needs Reform (89%)
To what extent do you agree/disagree that the retirement
system in this country is under stress and needs reform?
Source: NIRS Pensions & Retirement Security 2013
27
What do Americans think about at
“new” pension system for all?
Suppose Congress were considering a bill that would provide all
workers access to a new type of privately-run pension plan.
All Americans could participate and make contributions along with
their employer. Like a traditional pension, the money would be
professionally managed. At retirement, those who participate would
get a check every month for as long as they live. But unlike a
traditional pension, the benefits would be portable so that people can
take their money with them as they change jobs.
This retirement plan would also be easy for employers, because they
wouldn’t be responsible for administering the funds or managing the
money. Those tasks would all be handled by an independent board of
trustees. Employers would just have to enroll their employees and
make sure that their contributions go into the plan.
Is this a good idea?
28
Strong Support for “New” Pension
System for all Americans
Source: NIRS Pensions & Retirement Security 2013
29
High Appeal: Portable, Monthly Income,
Available to All
How appealing are each of the following aspects of this plan?
Source: NIRS Pensions & Retirement Security 2013
30
Economic Imperative for Retirement Security
To what degree do you agree/disagree that increasing numbers of
Baby Boomers retiring without pensions & inadequate savings is
putting stress on families and the economy?
Source: NIRS Pensions & Retirement Security 2013
31
Pensions Ensure Self-Reliance
To what extent do you agree/disagree that all workers should have a
pension to be self-reliant, independent in retirement?
Source: NIRS Pensions & Retirement Security 2013
32
Washington Must Give
Retirement Higher Priority
To what extent do you agree/disagree that leaders in
Washington need to give a higher priority to ensuring more
Americans can have a secure retirement?
Source: NIRS Pensions & Retirement Security 2013
33
Key Take-Aways
• Quiet Crisis – most Americans not prepared
to be self-sufficient in retirement retirement.
• High cost for retirement insecurity – for
individuals, families, public assistance,
broader economy.
• Americans see pensions as solution to
relieve high retirement anxiety.
• Public pensions recovering from impacts of
financial crisis, continuing pensions.
Questions?
Diane Oakley
NIRS Executive Director
202.256.1445
[email protected]
www.nirsonline.org