Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

Unsuccessful Shift to Costly 401(k) Accounts Led to Unprecedented Public Employee Turnover



A new case study released by the <a href="http://www.nirsonline.org" target="_blank" rel="noreferrer noopener">National Institute on Retirement Security</a> (NIRS), <a href="https://www.nirsonline.org/reports/retirement-reform-lessons-the-experience-of-palm-beach-public-safety-pensions/" target="_blank" rel="noreferrer noopener">Retirement Reform Lessons: The Experience of Palm Beach Public Safety Pensions</a>, looks at a decision by the Palm Beach Town Council to close its defined benefit (DB) pension retirement plan in 2012 and move its police officers and firefighters to a “combined” plan that offered a dramatically lower pension benefit along with individual 401(k)-style accounts.



As the case study shows, public safety workers quickly fled Palm Beach, retiring or finding employment in other cities that continued to offer DB retirement plans. Only four years after the sharp cuts to the traditional pension, the town found that about a third of its police department had three years of experience or less. Along with a retirement rate of 20 percent after the 2012 change, 53 mid-career safety officers left Palm Beach from 2012 to 2015. By comparison, only two mid-career employees departed from 2008 to 2011.



Palm Beach faced significant financial challenges as a result of the high attrition. The town had to cover high levels of overtime to fill staffing gaps and soaring training costs as it brought in rookie police officers and firefighters. And as the case study notes, “the move to (defined-contribution) accounts does nothing to reduce plan liabilities on its own.”



After the costs of employee turnover and recruitment skyrocketed, Palm Beach reversed course and, in 2016, <a href="https://www.copera.org/pension-changes-offer-cautionary-tale" target="_blank" rel="noreferrer noopener" class="broken_link">abandoned the defined-contribution aspects</a> of new retirement plans and strengthened the defined benefit provisions. As a result of the exodus of workers, the town council strengthened the pension elements of the plan with the aim of improving recruitment and retention.



The high rate of retirements and departures from the town might not be that surprising, given the value that public sector employees place on retirement benefits. A 2015 <a href="https://www.nirsonline.org/wp-content/uploads/2017/07/final_opinion_research_2015.pdf" target="_blank" rel="noreferrer noopener">NIRS study</a> found that 88 percent of public-sector employees rate retirement benefits as extremely or very important, compared to 57 percent who said the same the about salary.



The experience in Palm Beach mirrors <a href="https://www.nirsonline.org/wp-content/uploads/2017/11/public_pension_resource_guide_-_case_studies_of_state__pension_plans_that_switched_to_defined_contribution_plans.pdf" target="_blank" rel="noreferrer noopener">similar experiences of statewide plans</a> in Alaska, Michigan, and West Virginia, where shifts from DB pensions to 401(k)-style accounts caused pension plan costs to skyrocket.



For more on defined benefit and defined contribution research, see these PERA on the Issues posts:



<a href="https://www.copera.org/pension-changes-offer-cautionary-tale" target="_blank" rel="noreferrer noopener" class="broken_link">Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans</a>



<a href="https://www.copera.org/pension-changes-offer-cautionary-tale" target="_blank" rel="noreferrer noopener" class="broken_link">Report: Defined Benefit Plans Increase Retention and Reduce Turnover Costs</a>



<a href="https://www.copera.org/pension-changes-offer-cautionary-tale" target="_blank" rel="noreferrer noopener" class="broken_link">Importance of Public Sector Defined Benefit Plans</a>

Pension changes offer cautionary tale

The New York Times’ journalist Eduardo Porter asks a critical question in his <a href="http://www.nytimes.com/2015/06/17/business/economy/doing-more-not-less-to-save-retirees-from-financial-ruin.html?_r=0" target="_blank" rel="noreferrer noopener">Economic Scene column</a>: “How can workers and their employers be convinced, cajoled or compelled to consistently save more?”



He begins by making the case that most Americans lack the skills to make investment decisions and manage their own retirement savings. (Take <a href="http://www.nytimes.com/interactive/2015/06/16/business/economy/financial-literacy-quiz.html" target="_blank" rel="noreferrer noopener">an interactive quiz</a> to test your own financial literacy.)



Of respondents to a nationally representative <a href="http://www.nber.org/papers/w17078.pdf" target="_blank" rel="noreferrer noopener">Health and Retirement survey of Americans age 50 and over</a>, only one-third correctly answered all three fairly basic questions about interest rates, inflation and investments.



Along with their poor preparation to understand the intricacies of saving and investing, most American workers are also not very good savers.



From 1990 to 2010, the typical contribution to 401(k) accounts ranged from 4.7 to 5.2 percent of earnings. (Note that <a href="https://www.copera.org/doing-more-not-less-to-save-retirees-from-financial-ruin" target="_blank" rel="noreferrer noopener" class="broken_link">not every American worker has access to a 401(k) account</a>.) Even the age group who tends to save the most – those aged 65 to 69 – typically saved 7.5 percent in 2005. If employers were to match half of their workers’ contributions, American workers at retirement still would not be “anywhere near where they must be.”



Coupled with low savings rates, early withdrawals from retirement savings accounts and large fees diminish the savings workers have available at retirement.



So Porter argues that employers, the government, or both, may need to step in to “prevent a demographic catastrophe.”



“That might require enhancing Social Security rather than limiting it,” Porter writes. “Or it might require employers to take back more of the responsibility for employee’s retirement savings.”



He concludes with an argument from Brad Delong, an economist at the University of California, Berkeley:



“The 21st century will see longer life expectancy, and thus a greater role for pensions,” Delong explains. “Yet here in the United States the privatization of pensions via 401(k)’s has been an equally great disaster.”

Doing More, Not Less, To Save Retirees From Financial Ruin

Our world has become increasingly complex and the big issues we face have no simple solutions. That’s especially true when it comes to the topic of retirement security. With all the news and commentary on the sustainability of public retirement plans, how are we able to discern the facts?



As typical consumers, most of us compare the features and prices of the products we purchase before letting go of our hard-earned dollars. But do we comparison shop and evaluate the “features” of the information we receive every day? Here are a few tips (and some caveats) on how to be a smart consumer of information.



Don’t believe everything you read or hear



We’ve probably heard this from our parents, but we need to practice it. Just because something is on the Internet, on TV or radio, or in the newspaper doesn’t mean it’s valid. This is especially true now that it’s relatively easy for anyone to have their “news” published online.



Consider the source



Here’s another bit of advice we all need to heed. Where was the information originally published? As the media industry has consolidated over the last decade, a lot of content printed in local newspapers and aired on evening news programs is originally from somewhere else. What do you know about the source? Who owns the original content? Keep in mind that the source of the information is a business after all, and as such, they are selling you a product. Is it something you want to buy?



Compare different “channels” for competing views on the issue



Whether you’re watching TV, listening to the radio, reading a newspaper in print, or reviewing information on your tablet or smart phone, you may want to see what others are saying about the topic. You might be surprised at how differently the subject is covered by different media outlets. The Internet makes this very easy to do, but always remember the first caveat: Don’t believe everything you read or hear.



Do your research



One of the more recent trends in media is for foundations, “think tanks,” and advocacy organizations to publish “news.” Again, here’s where the Internet is useful. Find out where a particular group gets its funding and ask similar questions of the funders. Do you share their world view? Do you know any of the people who sit on the board? Do they have an agenda? What are they selling?



Use perspective



As humans, we are highly motivated by our emotions. Advertisers, entertainers, and politicians know this. Is the information you are consuming pushing your hot buttons? If so, and you’ve considered the source, compared differing viewpoints, and done your research, it may be time to step away and put the information aside for a while. Or it could be time to become even more engaged with an issue, sharing your own opinion with friends and family, through social media or even a letter to the editor. Just be sure to reflect the perspective you’ve gained by thoughtfully evaluating the information at hand.



Become a critical thinker



If you adopt these practices, you will have all the tools you need to be a smart consumer of information. By thinking critically about complex issues including retirement security and the sustainability of public retirement plans, you will be better informed and better positioned to help others see your side of the story.



Consider becoming a PERA Ambassador



One of the benefits of being a <a href="https://www.copera.org/2016-legislative-session-begins-will-pera-be-discussed" class="broken_link">PERA Ambassador</a> is being among the first to hear directly from PERA on issues affecting our members. Ambassadors receive timely legislative updates, participate in exclusive telephone conferences with PERA executives, and have an opportunity to represent PERA in communities across the state. Our 800 ambassadors play a critical role in PERA’s strategy to communicate the value of PERA to Colorado, from submitting Letters to the Editor to meeting with legislators and other community leaders. Learn more about getting involved to represent PERA locally and being an informed consumer – and communicator – of PERA information.

How to Be a Smart Consumer of Information

Case studies just released by the <a href="http://www.nirsonline.org/" target="_blank" rel="noreferrer noopener">National Institute on Retirement Security</a> (NIRS) highlight the challenges that three states have faced in their switch from defined benefit (DB) to defined contribution (DC) retirement plans for their public employees. Rather than saving money, Alaska, Michigan, and West Virginia exacerbated their funding problems and increased their pension debt. Together, these states offer a cautionary tale for those who might believe that DC plans are less costly and are better suited for managing a public sector workforce.



From the <a href="https://content.copera.org/cautionary-tales-case-studies-show-how-states-face-funding-debt-challenges-after-switching-to-defined-contribution-retirement-plans/" target="_blank" rel="noreferrer noopener">report</a>:



Overall, certain trends appear common to all three states, such as:



<ul>
<li>Changing from a DB plan to a DC plan did not help an existing underfunding problem, and, in fact, increased pension plan costs.</li>



<li>Workers under the DC plan face increased levels of retirement insecurity.</li>



<li>The best way to address a pension underfunding problem is to implement a responsible funding policy of making the full annual required contribution each year and to evaluate and adjust assumptions as well as funding over time.</li>
</ul>

Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans

The Director of <a href="https://www.copera.org/pension-words-of-wisdom" target="_blank" rel="noreferrer noopener" class="broken_link">Federal Relations at the National Council on Teacher Retirement (NCTR)</a> reported on the recent remarks of Earl Pomeroy, a retired Congressperson from North Dakota. Pomeroy’s straightforward comments identified some common misperceptions about retirement plans and provided valuable insight on how to view pension plans from a long-term perspective.



<h3 class="wp-block-heading">Earl Pomeroy’s Top-Ten “Lessons Learned” for Public Pensions</h3>



By Leigh Snell, NCTR Federal Relations Director (reprinted with permission)



Earl Pomeroy was the U.S. Representative for North Dakota’s at-large congressional district from 1993 to 2011, and served on the powerful House Ways and Means Committee. He was one of the most knowledgeable Members of Congress when it came to retirement security in general and public pensions in particular, and he was a staunch believer in and defender of the defined benefit approach.



In addition to speaking about the national retirement savings crisis and the reasons for it (including, in his opinion, the shift from defined benefit plans to defined contribution plans, which he characterized as “the biggest reason for many”), Mr. Pomeroy also gave his top 10 “lessons learned” for public pension plans. Pomeroy said that he gleaned these from a long conversation with Sparb Collins, the director of the North Dakota Public Employees Retirement System, based on both their long careers in public service.



It is a list that we would all do well to remember and utilize in our conversations with others concerning public pension plans and the defined benefit model:



<ol>
<li>Risk shared collectively beats risk carried individually. Earl summarized this by reminding the audience that this is the spirit behind Social Security: “All of us protect each of us.” He also noted that the rejection of President George W. Bush’s effort to create private accounts in Social Security reflected the public’s overwhelming desire for “coverage/protection” versus “exposure/opportunity.”</li>



<li>Avoid panic decisions; the sky is not falling. Noting the old adage that “Figures lie and liars figure,” Earl reminded his audience that pension debates are rarely on the level. He said that “Proponents of pension reform use funding assumptions which exaggerate funding challenges in order to drive legislation in ‘crisis response’ mode rather than engage in a straight-forward discussion of allocation of risk.”</li>



<li>Failure to fund plans is intergenerational theft. A failure to fund jeopardizes pension plans, reduces future benefits, and increases costs to taxpayers down the road, Earl observed. It is an “act of theft” against future generations, he said.</li>



<li>Asset liability matching for pension funds is misused. Pension funds are NOT banks or insurance companies, Earl stressed. “Assets do not need to constantly match liabilities,” he underscored. They only need to match when liabilities are owed or can be called.</li>



<li>Long-term liabilities are appropriately funded in part by long-term earnings. In other words, keep a long term perspective. “Risk-free” or “zero risk” reserving using a Treasury rate only, as Earl described the theory of financial economists such as Joshua Rauh, only creates a 100 percent risk of what Earl noted as “funding shortfalls, lower benefits, and higher taxpayer and employee contributions.</li>



<li>Public pensions do not exist in their present form by accident. As Earl pointed out, current public pension design is rationally tied to employment incentives necessary to make the public sector work. He also used this opportunity to criticize as “all wrong” the paper that was presented later in the conference by the Urban Institute that was critical of public plan design as being unfair to younger employees and bad for public policy. Noting that while he may not have worked in a Washington think tank, he did have many years’ experience as North Dakota’s Insurance Commissioner running a state agency, and he didn’t want a plan design to encourage mobility. He said that instead, he wanted the pension benefit to encourage a career committed to longevity in order to handle the complex work of his agency. “Have a bit of humility,” he cautioned researchers: “Thousands of plans overseen by tens of thousands of trustees” over the years “have given this some thought.”</li>



<li>A good offense is often used as a defense. Earl used this as an opportunity to both discuss the recent behavior of credit rating agencies such as Moody’s as it pertains to public plans, while also encouraging plans to do the right thing and then tell people about it. He noted the role of such agencies in “blessing” bad paper from the worst of the subprime mortgage “scam” and now coming up with new evaluations of public plan liability that is “not rationally linked to the assessment of plan performance over time.”</li>



<li>Be wary of non-stakeholders suddenly showing great interest in your business. “You may have a math problem: they may have an agenda,” he warned. Earl noted examples of what he called “helpful stakeholder leadership,” mentioning both NCTR and <a href="http://www.nasra.org/" target="_blank" rel="noreferrer noopener">NASRA</a> by name, and the responsible “tweaks” to governmental plan structures that have been made across the country in recent years. He contrasted them to the “predetermined prescriptions” of <a href="http://www.alec.org/" target="_blank" rel="noreferrer noopener">ALEC</a>, <a href="http://www.atr.org/grover-norquist-a3016" target="_blank" rel="noreferrer noopener">Grover Norquist</a> and “others.”</li>



<li>Congress is incapable of devising “one-size-fits-all” responses in this realm of local control. Earl gave examples of poorly thought-out examples of Congressional tinkering, citing the [Representative] <a href="https://www.copera.org/pension-words-of-wisdom" target="_blank" rel="noreferrer noopener" class="broken_link">Nunes’ “PEPTA” legislation</a> and the [Senator] <a href="https://www.copera.org/pension-words-of-wisdom" target="_blank" rel="noreferrer noopener" class="broken_link">Hatch annuity proposal</a> by name. Local (non-Federal) plans support local purposes over the long term to best attract and retain State and local employees, he reminded his audience.</li>



<li>There is no news value in competently performing public pension funds or prudent, technical fixes. “Forget about the chatter; focus on the numbers” is how Steve Yoakum, the <a href="https://www.copera.org/pension-words-of-wisdom" target="_blank" rel="noreferrer noopener" class="broken_link">Executive Director of the Public School and Education Employee Retirement Systems of Missouri,</a> characterized Earl’s point.</li>
</ol>

Pension Words of Wisdom

Earlier this summer, <a href="https://content.copera.org/national-institute-on-retirement-security-the-retirement-savings-crisis-is-it-worse-than-we-think/" target="_blank" rel="noreferrer noopener">Colorado PERA (PERA) reported to the Legislative Audit Committee</a> of the Colorado General Assembly that its investment portfolio earned more than 12 percent in 2012, that its unfunded liability decreased by $800 million, and that a financial audit conducted by KPMG found no significant deficiencies or material weaknesses in PERA financial reporting or controls.



Also this summer, the National Institute on Retirement Security (NIRS) issued a report, <a href="https://www.copera.org/national-institute-on-retirement-security-the-retirement-savings-crisis-is-it-worse-than-we-think" target="_blank" rel="noreferrer noopener" class="broken_link">The Retirement Savings Crisis: Is It Worse Than We Think?</a> The report looks at retirement readiness of working Americans, including both those who have access to retirement accounts like pensions or 401(k)s, and those who don’t. Not surprisingly, the report concludes that the vast majority of Americans are unprepared for retirement. But the amount of that deficit—the difference between what most Americans will need for a basic retirement and what most Americans have saved—is alarming.



A few years ago, in 2010, PERA officials recognized that as a result of the Great Recession, its defined benefit plan was in a precarious financial condition. They worked with state legislative leaders and other stakeholders to craft legislation to put the plan back on track. The information PERA provided to the General Assembly’s Legislative Audit Committee shows the very earliest indicators that the 2010 legislation is beginning to work and that the shared sacrifices of employers, employees, and retirees have the plan headed in the right direction.



The NIRS report reveals that most Americans have not seen a similar turnaround in their retirement savings prospects. In fact, the report shows that most Americans have little to nothing saved for retirement.



Looking at data from the Federal Reserve’s <a href="http://www.federalreserve.gov/econresdata/scf/scf_2010.htm" target="_blank" rel="noreferrer noopener">Survey of Consumer Finances</a>, the report analyzes retirement plan participation, savings, and overall assets of all U.S. households age 25 to 64, not just those with retirement account assets.



Most Americans without a pension or defined benefit plan, like the one PERA provides, are drastically unprepared for retirement. According to the report:



<ul>
<li>More than 38 million working households in the U.S.—almost half (45 percent) of all American households —do not have anything saved for retirement.</li>



<li>Among households approaching retirement (ages 55–64), the median retirement account balance was only $12,000. For all working-age households (ages 25–64) the median retirement account balance was only $3,000. In other words, the average U.S. working-age household has virtually no retirement savings.</li>



<li>Of all working households in the U.S. between the ages of 25 and 64, 80 percent have less than their annual income saved in retirement accounts. Even for those approaching retirement (ages 55–64), 60 percent of working households still have less than one year of annual income in retirement savings.</li>



<li>The total U.S. retirement savings deficit is estimated somewhere between $6.8 and $14 trillion. (These figures compare the total retirement assets of U.S. working households, ages 25–64, to recommended minimum retirement savings targets. The savings targets are based on household savings recommendations from Aon Hewitt, a large human resources consulting firm, and financial services provider Fidelity Investments. Both recommendations assume that workers will need to replace 85 percent of their retirement income and, with Aon Hewitt’s recommendation, that workers retire at age 65 or with Fidelity’s recommendation, at age 67.)</li>
</ul>



To put the $6.8 to $14 trillion gap in perspective, the <a href="http://www.usdebtclock.org/" target="_blank" rel="noreferrer noopener">current debt of the United States</a> is more than $16 trillion.



It is hard to predict what the consequences of this national crisis will look like. For one, older Americans will continue to rely on Social Security as a primary source of income, even as national policy debates focus on proposals to reduce, rather than strengthen, Social Security benefits.



Poverty among seniors will continue, or even grow. As the report notes, data released by the U.S. Census Bureau indicated that, when medical expenses were taken into account, senior poverty was 15 percent in 2011—significantly higher than the standard poverty measure of 8.7 percent. Poverty among seniors has impacts far beyond the poor seniors themselves. Social services ranging from housing assistance to meeting basic food and medical needs face huge burdens as Baby Boomers stop working without the retirement savings they need. Families and communities will have to absorb these costs and consequences.



The 2010 legislation that returned PERA to a financially stable path required difficult sacrifices from employers, employees, and retirees. But as a result, public employees in Colorado have steady retirement income they can count on. Communities across Colorado can count on these retirement distributions too, as $300 million is infused into the Colorado economy each and every month.



But the challenge of providing for most Colorado seniors, those who do not have a defined benefit plan like PERA’s to rely on, will require more difficult policy discussions and maybe even some painful decisions down the road.



<a href="https://www.copera.org/national-institute-on-retirement-security-the-retirement-savings-crisis-is-it-worse-than-we-think" target="_blank" rel="noreferrer noopener" class="broken_link">Read more information on the NIRS The Retirement Savings Crisis: Is It Worse Than We Think? study.</a>

Tag Archives:

Pension changes offer cautionary tale

Doing More, Not Less, To Save Retirees From Financial Ruin

How to Be a Smart Consumer of Information

Cautionary Tales: Case Studies Show How States Face Funding, Debt Challenges After Switching to Defined Contribution Retirement Plans

Pension Words of Wisdom

National Institute on Retirement Security: The Retirement Savings Crisis: Is It Worse Than We Think?

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