Pension Reform Proposals

Last year in a post entitled “Pension Reform Options,” the following suggestions were made – none of them terribly original – for ways to restore equity and sustainability to public sector pensions in California:

(1) Lower annual pension accrual to 1999 levels for new hires:
(2) Lower annual pension accrual to 1999 levels going forward for existing
(3) Reverse any retroactive pension accrual enhancement ever granted existing hires.
(4) Retired public employees will see no change to their pension benefit.
(5) Spread “final year” salary calculation over five years and eliminate “spiking.”
(6) Establish ceiling on maximum pension benefit.
(7) Raise eligible retirement age.
(8) Reduce pension benefit by amount retiree earns in new job.
(9) Eliminate tax-free or reduced tax pensions.
(10) Aggregate multiple pensions under same ceiling.
(11) Require conservative pension fund investment strategy.
(12) Require public employees to contribute a fair share to their pension fund.

Last week a group advocating pension restructuring in California, the California Foundation for Fiscal Responsibility, published online two pension reform proposals. These proposals, put forward by experts on the issue, are interesting examples of what may be necessary in order to maintain pension solvency without either punitive tax increases or grotesque service cuts. They are also interesting because, along with including basic recommendations such the ones listed above, they include many nuances that most publicized pension reform proposals don’t cover. Because they are the product of in-depth analysis by qualified experts who have spent years studying the issue, anyone seriously interested in this issue should click to these online proposals and review them carefully. Here are some of the suggestions, not listed above, that are designed to correct less publicized, but equally critical problems with the current system:

(1) Disability benefits for public employees hired on or after July 1, 2013 shall be provided through insurance policies.
(2) No public employee hired on or after July 1, 2013 may receive lifetime or formulaic retirement medical benefits prior to age 65.
(3) Before each decennial anniversary of the July 1, 2013 transition date, the Legislature shall adjust this age requirement to reflect changes in longevity.
(4) The defined retirement income benefits for employees hired on or after July 1, 2013 shall not exceed the median statewide household income ($56,344 in 2009). [a subsequent item provides for adjusting for inflation]
(5) All benefits from Social Security and California public pension plans shall be integrated for the purpose of determining such employees’ retirement income benefits, not including income from defined contribution plans.
(6) After January 1, 2014, at least two-thirds of the members of a public pension plan’s governing trustees shall be independent of that retirement system and its participating employers.
(7) At least two-thirds of independent trustees shall be qualified for service as certified or licensed financial, actuarial, accounting, legal, benefits or investment professionals at the time they are selected.

The pension reform proposals on the CFFR website are comprehensive enough to form the basis of legislation with very little modification, and they fill some huge holes. Item (1) moves the awarding of disability retirement benefits into the private sector, greatly reducing the opportunities for retirees to fraudulently claim disability in order to receive 50% of their retirement pension exempt from state or federal taxes. Item (2) begins to address the huge looming liability for retirement health benefits that often begin when retirees are still quite young. Item (4) places a cap – a pretty low cap at that – on the maximum allowable defined benefit pension. Item (5) prevents retirees from receiving social security and a pension (or social security and two pensions, etc.), if those benefits combined exceed the cap established by item four. Item (6) attempts to ensure an independent governing body for pension benefits, and item (7) attempts to ensure (gasp) that the people on this governing body are qualified to oversee multi-billion dollar pension funds.

Here are the complete proposed pension reforms coming from the California Foundation for Fiscal Responsibility’s website:

Pension Reform Alternative A:
The Fair and Sensible Public Employee Retirement Plan Reform Act

Pension Reform Alternative B:
The Fair and Sustainable Public Pension System

Alternative B contains very provocative language, because it not only proposes lowering rates of pension benefit accruals going forward for existing employees, but provides a method for doing so – declaring a fiscal emergency. Here’s the language:

“Freeze all current defined benefits (DB) plans at all state and local government agencies.  Amend the California Constitution to declare the level of unfunded liabilities in current db plans a fiscal emergency and suspend further accruals to plans under 90% funded until they demonstrate they have maintained their funding levels above 100% for three consecutive years using asset market values and conservative actuarial assumptions (5% liability discount rate, 6% earnings assumption).  After three years above 100% funding, the governing board of the jurisdiction may place the question of re-opening the current plans before their voters on a statewide general election ballot subject to a majority vote of the affected jurisdiction.  The freezing and re-opening of plans shall be excluded from collective bargaining.”

Anyone reviewing these proposals will hopefully already realize that public sector pension benefits in California are going to have to be reduced. They were negotiated during a time of unsustainable, debt-fueled economic growth, and hence are calibrated on unrealistic economic expectations. The more relevant questions are what the specific reforms will be, who is affected, and how deep the benefit reductions will need to be. What is also evident from reviewing these proposals is that there are solutions. This is encouraging to all of us who care about the future of California.

20 comments to Pension Reform Proposals

  • Rex The Wonder Dog!

    My plan to fix the pension mess is FAR SUPERIOR;

    1) Cut all salary for gov employees making $100K or more by 25%, then cut salary for those making less based on a decreasing scale, with a floor of $40K for no more cuts.

    2) Freeze those salaries at that level for 5-10 years.

    3) Apply all the money saved from the cuts – all of it – directly into the pension shortfall.

    This is a very good and workable plan. It freezes costs at today’s levels while at the exact same time curing the shortfall, without taxes or pain to the innocent taxpayers. It forces those receiving these multi-million dollar pensions pay for them out of their own pocket.

    BOOM!

  • Charles

    Don’t stop there. Every cent a person earns that is paid for by State taxes still belongs to the State. Every laborer and every equipment operator who ever worked for the State building a highway owes their house and their children to the State of California. Take their money, after all they did not earn it. You paid for it. With your taxes. They are all lazy bums sucking at the public trough. And so are the military. And the cops. And the firefighters. And the trash collectors and any one who works for government.
    Everyone but you.
    You are the only one who is sacred because you work for private enterprise. Therefore you are as clean as the newly fallen snow. Horsefeathers!
    I pay your salary every time I buy a gallon of gas or a loaf of bread or a tortilla. Give up your feelings of superiority. I pay your salary.

    Get off your high horse.

  • Rex The Wonder Dog!

    Wow, Charles is finally at a loss of words that make any sense whatsoever!

    BTW, CalTurds is BK, they have enough money to last 30 years max. 2.41% ROI is not going to cut it.

    Prepay the rent on your doublewide Charles, that way when the haircut comes you will still have a place to live.

  • Charles

    No problem at all. I own my house, my car and my truck and trailer and have no credit card bills.

    I will collect $90,000 per year from State retirement plus COLAs until I die. Of course my wife will collect if I die first.
    And 16 months from now I will collect Social Security at about 1700 per month.

    I paid for it. And I will collect it.

    If you are young you should start thinking about your future. I certainly did.

  • Rex The Wonder Dog!

    I will collect $90,000 per year from State retirement plus COLAs until I die.
    =================

    The only way you will be collecting $90K per year with COLA’s “until you die” is if you kick the bucket within the next 10 years-otherwise it is going to be haircut city. Or do you not read the news on budget deficits and unfunded gov pension plans, or know that CalTurds is only 46% using legit accounting standards???

    But look on the bright side, you are in CalTurds and are not going to go BK as fast as CALstrs, which is in even WORSE SHAPE.

  • Rex The Wonder Dog!

    I paid for it. And I will collect it.

    ===============
    No, you didn’t pay for it. And it is highly doubtful you will collect more than 50 cents on the dollar.

    Like I said earlier on Greenhuts column, your mini contribution of 5%, including adding in an annual ROI of 8%- would total less then $150-250K and would be exhausted within 2-3 years.

    I love it when you public employees make the whopper claim you “paid for it” or “earned it”.

  • Charles

    The employee’s total compensation is the bottom line. That includes salary and benefits.

    If you reduce benefits you have to increase salary to stay in any way competitive with the private sector.

    A few years down the road the private sector will pick up again and this will all be history.

  • Rex The Wonder Dog!

    The employee’s total compensation is the bottom line. That includes salary and benefits.
    ===============
    Thank you Captain Obvious.

    If you reduce benefits you have to increase salary to stay in any way competitive with the private sector.
    ============
    The public sector makes FAR more than the private sector in nearly ALL job categories-one exception is IT. For low skill, semi skilled jobs it is 3-20 times more. Please show me where a GED and no rior work experience can get a $200K comped job n the real world like a gov cop, prison guard or FF. Your whoppers that they make less have been refuted by all legit sources.

    A few years down the road the private sector will pick up again and this will all be history.
    =================
    LOL……right, that whopper belongs right up there with CalTurds claim that SB400 will not cost taxpayers any money.

    Your nose is growing again Charles, maybe it is time to change your name to Pinnochio!

  • YoMama

    Let me get this straight. You have to pay into social security, but you can’t collect from it?

  • Charles

    Rex the Blunderdog doesn’t understand basic math. California taxpayers have put in approximately 18% to retirements. The rest has come from employee contributions and Calpers investments. One the employer contributions are made these monies no longer belong to taxpayers any more than the employees salary does.

    Simply saying so doesn’t make it so.

    That was the deal in 1969 and still is pretty much the deal today. If you want to take back that 13% tacked on in 1999 knock your self out.

    The 18% the State kicks in is nothing more than deferred compensation. It has been about the same for 40 years I know of. Don’t bother telling me how in the last five yours State employees have caught up with private sector wages. What about the previous 35 years?

    The State cannot hide behind the fact they want to spend money on bullet trains and welfare to get out of paying their bonds and retirements.

    Like I said, go after that 13%. The rest is part of the contract when I waked in the door.

  • Troll Monitor

    Charles—LOL “rex the blunder dog”? That’s great!!! Down here in Orange County where he and his dull normal buddy post on every article in the paper from hog calling to stamp collecting……we call him Rex Poodle! He and his poor buddy are daily beaten down by essentially EVERYone on the site — sad…..but pretty funny.

  • Editor

    Troll Monitor – while Charles and Rex enjoy lightly insulting each other, they are also exchanging actual thoughts on the topic. Do you have something to contribute?

  • Rex The Wonder Dog!

    Down here in Orange County where he and his dull normal buddy post on every article in the paper from hog calling to stamp collecting……we call him Rex Poodle!
    =============
    That crushed me :)

  • Charles

    Rex The Wonder Dog!

    Said:

    “The public sector makes FAR more than the private sector in nearly ALL job categories-one exception is IT. For low skill, semi skilled jobs it is 3-20 times more.”

    3 to 20 times more?

    You actually know of semiskilled jobs in the public sector that earn twenty times minimum wage? $8 X 20 = $160/hr.

    Either share what you have been smoking or tell me where do I apply?

    Basic workers like secretaries, highway maintenance workers and groundskeepers earn $3000 to $4000 per month. That is $17 to $23 per hours, not even three times minimum wage.

    I think you pulled your 3 to 20 times private scale out of your left ear.

  • boprn

    Came back for a look after being absent from this site for awhile. WOW. Rex keeps spewing the s***. Again Charles, WHY WASTE YOUR TIME HERE.

    Would love to have a debate with Rex or TL in front of an audience. Would be so easy to out them.

  • Editor

    Boprn: I should have also called Rex on the “3-20x” more. My research indicates the entry level and low skill jobs in the public sector only pay 2-5x more (total compensation – you and I make different assumptions on that calculation) than identical work in the private sector.

    Welcome back.

  • Charles

    Sorry, fat fingered it…

    A Caltrans Highway Maintenance Worker is probably a typical entry level state worker. Beginning pay is $2873/month or $16.57/hour, about double minimum wage. Of course at this level benefits as a % of pay are more than a higher paid employee. If he has a family his health insurance alone is worth maybe $1000/month. So I suppose his total compensation is three times minimum wage.

    However, after six months on the job he will be able to know more than how to say “Do you want fries with that”?

    The written testing and oral examination weeds out those who can only learn when to flip the hamburger. Because the State needs people who can perform many of various jobs, can make decisions and have the ability to advance.

  • Charles

    Sorry it took me so long to notice this but I would like to reply and Rex shows up here frequently.

    Rex The Wonder Dog! says:
    July 2, 2010 at 2:00 pm
    It is interesting to me, to learn that the practice of applying pension formulas retroactively in the State goes back 97 years.
    ======
    Of course the pension estimates go back decades for estimations of FUTURE costs-but that is wildly dfferent from granting RETROACTIVE pensions for work already performed.
    Paying pensions on an ONGOING forward basis is not the problem, it was the retroactive portion that is the problem.

    Maybe I don’t understand this entirely, but I know for a fact that the 1.66% formula at 60 was changed to 2.00% at 60 in 1971 and was retroactive for employees who had worked for the State for 40+ years.

  • Wags

    IMHO the political coalition that is necessary for pension reform that just cuts new hires will fall apart. Sooner or later as these new hires realize they are being paid less, work longer, and have less retirement so that retired employees can keep their bloated pensions will fall apart.

    The solution is tax all public pensions over $50,000 with a 25% surcharge and build up the pension funds to realistic levels of funding. The public employee unions always want tax increases so give it to them.

  • Ian Jones

    I have to agree with Wags here. Surely the current system just creates huge imbalances in wealth. Certainly taxing pensions over a designated amount would help matters; I am aware that people benefiting from such high pensions worked hard for them and would be likely to object to the proposal, but the truth is that they have worked no harder than employees today. Those currently working will be employed for a lot longer as well, yet if the current system is retained, will receive a lot less in their retirement than their counterparts 30 years ago. Of course, this inequality should be addressed.