Analysis: Move to new plans may not save public pensions

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Sherri (C) and Curtis Walker (R) go over retirement options with Calpers Benefit Program Specialist Lisa Bacon (L) at the Calpers regional office in Sacramento, California, October 21, 2009.

Credit: Reuters/Max Whittaker

By Lisa Lambert

WASHINGTON | Fri Sep 30, 2011 11:37am EDT

WASHINGTON (Reuters) - To fix their persistent pension problems, some states are looking to reshape their retirement plans to resemble those in the private sector, but they may find may employees resistant and the savings elusive.

Over the last few decades, the private sector has ditched traditional pension plans with their defined benefits. They have been replaced with defined contribution accounts, such as 401(k)s, in which employees allocate a set amount each month to invest -- often partly matched by employers -- and then cash out at retirement.

This has left the public sector as the main provider of defined benefit plans, which pay employees a fixed amount each month after retiring.

But pension funds have been stung by the recent financial crisis and recession, leaving taxpayers and political leaders agonizing over the possibility they will be unable to afford those defined payments. Estimates of a total shortfall range from around $700 billion to $3 trillion, due to differing forecasts of investment returns.

"If the idea is that tax revenues are down and state budgets are crunched, and they surely are ... I think it's worthwhile to take a step back and look at the actual costs," said Ilana Boivie, director of programs for the National Institute on Retirement Security, or NIRS

"Most states that have done those feasibility studies have found that you're not going to save any money" by switching to a defined contribution plan.

According to the National Conference of Public Employee Retirement Systems, the next two years will see "modest growth" in hybrid plans that combine elements of the defined benefit and defined contribution schemes. Around 5 percent of public entities already offer hybrids.

About 20 percent provide defined contribution plans, and around 5 percent will add a defined contribution option in the next two years.

Some states want to keep current employees in pensions and put new hires into defined contribution plans.

Alaska, the District of Columbia, Michigan and Minnesota all use defined contribution plans as their primary retirement offerings. In July, Utah began requiring employees to choose between a defined contribution plan and a hybrid.

The NIRS, in a study released on Thursday, found that moving into a system similar to 401(k) accounts can push up costs, especially at the start.

"That unfunded liability represents a debt that is a benefit promised and owed," said Boivie. "That unfunded liability will not go away."

When the defined benefit plan is closed to new members, employees and employer contributions to the plan could spike because the time span for wiping out funding gaps will be shorter and new employees will be putting money into their own retirement accounts instead of the pension plan.

Meanwhile, employers must bear the administrative costs for both plans as they phase out the pension program.

Defined benefit plans pool risks to achieve greater investment returns, the NIRS report found. They are able to "provide the same retirement income at about half the cost of a defined contribution plan."

The study also looked at retirement systems that offer employees a choice and found almost all workers prefer pensions.

The group examined the West Virginia's Teachers Retirement System's decision to provide new employees with defined contribution retirement plans in 1991. It found that the loss of new members made it more difficult to finance the unfunded obligations of the defined benefit plan.

Stock market problems prevented retirements from 2000 through 2002 and those in the new plan "achieved much lower investment returns" than the closed pension fund. In 2005, West Virginia returned to a defined benefit plan.

Nebraska opted for a defined contribution plan in 1967, which it closed in 2002 for a plan that does not let employees control investments made with their accounts. Instead, it guarantees an annual return and then pays out like a defined contribution plan, according to the National Conference of State Legislatures.

ALL GOVERNMENTS RETHINKING RETIREMENT

During the 1990s stock market boom, said Timothy Rouse, vice president of business development and public markets at ING U.S. Retirement, interest in public sector defined contribution plans surged. But, he said, it came from employees hungry for higher returns and not from states seeking savings.

The ING retirement group does not advocate how governments structure their retirement systems. Instead, it helps them manage the redesigns they choose.

Rouse said state and other public authorities can struggle with shifting to defined contribution plans because "in the short-term you're trading an 'IOU' for a hard dollar expense."

During recent budget crises, some states shrank their pension contributions or skipped them entirely.

Rouse said each state and local government has a unique set of issues to address in pensions. He added, though, that the recent recession is forcing all governments, including the federal government, to look at reforms.

"It's pretty much across the board. No one is safe from these discussions," he said.

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Analysis: Obama jobs plan strengthens growth prospects

United States President Barack Obama arrives to address a joint session of Congress on Capitol Hill in Washington, September 8, 2011.

Credit: Reuters/Jason economy Editor ReedBy Stella Dawson, U.S.

WASHINGTON | Fri 09/09/2011 12:41 EST

WASHINGTON (Reuters)-the jobs of President Barack Obama package could lift economic growth by one to three percentage points in 2012, add more than one million jobs and reduce the unemployment rate at least half a percentage point, judging by initial estimates.

Not exactly he can deliver the "jolt" Obama said in his speech to Congress Thursday night, but it would be enough to make a difference.

The basic idea is to give sufficient impetus to get recovery stop on the hunchback where families, banks and businesses have paid more than their debt loads and regained the confidence to start spending, loans and hire again.

Once demand picks up, the private sector will kick in and start hiring, and tax the props may disappear.

He would deliver economic medicine prescribed in recent weeks by Federal Reserve Chairman Ben Bernanke and the International Monetary Fund to prevent a worrying slowdown in global economic growth into recession.

Treasury Secretary Timothy Geithner also ensure their officials finance partners in the G7 meeting of leading industrial Nations in Marseille on Friday the United States is pulling its weight.

The wild card is of course if a Republican dominated House of representatives will agree with the complete package of $ $447 billion, a prospect unlikely given his criticisms that the stimulus program $ $830 billion in February 2009 was unable to deliver the takeoff of the economy and added to the huge budget deficit.

The American economy is so 2007 scars implosion of the housing credit, the bank failures resulted in 2008 and the deepest recession in 70 years that he's taking a long time to recover and create jobs.

"What you come up is that there is no silver bullet, no magic formula that this President or any person may propose that would bring unemployment below 5% next year," said Joel Prakken, Macroeconomic Advisers Chairman, economic modeling firm in St. Louis.

"He has to come from the private sector and for which you have to work with the slack with the housing crisis is repress aggregate demand," he said.

This suggests that the programme of work of Obama, that would probably serve as a palliative, not a cure, leaving room for the Federal Reserve provide more monetary stimulus to prevent the economy returned to fall out of recession.

BUILD AMERICA

Analysts in the Capital Economics estimated that the Obama plan is equivalent to 3% of GDP of the United States and must be sufficient to significantly increase the growth of 2012 if fully passed by Congress.

The biggest single impetus could come from a reduction of $ 250 billion in payroll taxes. Obama proposes to extend an existing 2 percent cut in payroll tax and increase its size to 3.1% for employees and adding a hack for employers.

"These reductions in payroll taxes are the proposals that have the greatest chance of being approved by Congress because it will be more difficult for Republicans to vote against the proposed tax cuts," said Paul Ashworth, Chief Economist of the U.S. economy of the Capital.

Tax cuts could add as much as $ 375 billion in economic output for the u.s. economy of $ 14 trillion, based on Congressional Budget Office estimated in August, the economic impact that fiscal stimulus programs can have on GDP.

But not all that would be money new impetus, since a cut payroll taxes of $ $112 billion is already in force and would simply be extended. In addition, the overall impact could be reduced because it does not target lower income workers.

"Gives money disproportionately people at the top of the income scale. Higher income individuals are more likely to save money, they don't need to spend it in essence, therefore, the actual impact is minor, "said Roberton Williams, senior fellow centrist Brookings Center for urban policy-tax.

Macroeconomic Advisers still estimated that the payroll tax of 2 percent cut extension alone would add 400,000 jobs and increase GDP in 2012 at 0.5%. The largest sum may increase that to about 0.7% GDP and 600,000 jobs.

The second largest in terms of Obama is US $ 105 billion in infrastructure investments, which could add as much as $ 262 billion for the economy, based on the CBO numbers.

Macroeconomic Advisers estimates that could create about 150,000 new jobs in the first year and add more than half a million jobs in three years-good news but small for an economy that usually generates more than two million jobs per year when in good health.

The challenge would also find "shovel-ready" projects where the highways, railroads, or renovation of school plans are on the drawing board is awaiting funding. Otherwise it can take years for major construction projects underway.

Extending unemployment benefits, which total US $ 49 billion in Obama's plan, also has a significant impact. He could add up to US $ 102 billion to the economy. Macroeconomic estimates of advisers would add 0.25% growth of GDP in 2012 and create 200,000 new jobs, putting more money in the pockets of consumers.

Economists were re-run computer models at the end of Thursday night to update your data. Based on a stimulus package of $ 300 billion less than Obama revealed, Ian Shepherdson, Us Economist at high frequency economics, had estimated an increase of 1.3% to GDP and 1.7 million jobs over the life of the programmes.

His initial reaction was if it were adopted in full, that is rather unlikely, the plan would reduce the rate of unemployment 9.1 per cent to 8 per cent in 2012 and give a welcome boost to an economy which grew at an annual rate of 1 percent in the second quarter. But is does not guarantee a solid recovery.

"This is going to be more than a panacea for our problems? It's hard to say, "said Williams. "This crisis has been deeper and longer than anything we've seen since the late 1930 and totally do not understand it. What we do know is that what we did in 2009 was not large enough. "

(Editing by Mary Milliken and Philip Barbara)

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