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The Utah Pension Model?
The WSJ reports on the Utah Pension Model:
As
Illinois and New Jersey struggle to reform their broken public pension
plans, we thought you might like to hear a success story for change.
Witness Utah, which last March replaced defined benefit pensions with a
401(k)-style plan for new state and municipal workers.
The
sponsor of the Utah reform was Senator Dan Liljenquist, who watched in
horror during the 2008 stock market plunge as the state pension fund
lost 22% of its assets. From nearly 100% funded in 2007, it fell to 70%
funded by 2009. Utah suddenly faced a long-term $6.5 billion funding
gap, and the state would have had to nearly double its annual
contributions out of the current budget to make up the shortfall.
Mr.
Liljenquist requested an analysis to determine the real and
unvarnished financial condition of the pension fund. The state was
assuming a 7.75% annual return on investment, and actuaries found that
if that return fell to only 6% the system would be technically
insolvent. The Utah constitution limits total state debt to 1.5% of the
value of all property in the state, and the unfunded pension liability
was one and a half times over that limit.
Utah's
constitution bars pension changes for current workers—short of an
imminent financial crisis in the fund—so the legislature created a
defined contribution plan for all new hires starting this year. The
state contributes 10% of each worker's salary (12% for public safety
workers and firefighters), a generous amount by private company
standards. If they wish, new workers can choose a defined benefit plan,
but the state contribution to such a plan is no longer open-ended but
is legally capped at 10%.
The reform has benefits for taxpayers
and public employees. Workers own their retirement account and can
carry it to another job. They also benefit because politicians can no
longer steal from the pension plan to pay for other government
spending. As for taxpayers, the reform will eventually slash state
pension liabilities in half and they no longer bear the risk of having
to pay higher taxes if the stock market declines.
Union
leaders nonetheless resisted the plan, holding public rallies and
threatening to defeat any legislator who dared to vote for it. But
polls found that Utah voters supported reform, recognizing that the
changes were fair and financially imperative. Not a single Republican
who voted for the reforms lost, and the GOP picked up seats in 2010.
From
now on in Utah, tax increases or spending cuts for schools, parks or
roads won't be necessary to make legally required payments to retired
state workers. The contrast couldn't be sharper with California, New
York, New Jersey, Illinois and other states in which pension
contributions are squeezing out other priorities.
We hear Montana could
be the next state to adopt the Utah model, and something like a dozen
more are interested in what looks to be a winner for taxpayers, workers
and state budgets.
I bring this to your
attention because I think other states are going to follow Utah's lead
and start shifting new workers into defined-contribution plans or
defined-benefit plans with caps on state contributions.
This
trend of converting into defined-contribution plans is worrisome and it
has been going on for quite some time in the private sector. Paul Delean
of the Montreal Gazette reports, Times are changing for company pension funds:
Canadian
companies with large pension-fund deficits are starting to play
hardball with employees, and it may just be the tip of the iceberg.
"Used
to be that few employers were ready to fight over it, but times are
changing," Michel St. Germain, a partner at Mercer Canada and
pension-fund consultant, told the firm's annual pension-outlook
conference in Montreal on Tuesday.
In Sudbury, a
year-long strike did not deter Vale Ltd. from its plan to switch new
employees to defined-contribution plans, in which it makes an annual
pension contribution per employee but assumes no financial risk beyond
that. Vale's defined-benefit pension fund had a shortfall of $729
million.
In Hamilton, U.S. Steel Canada locked out 900
employees at the former Stelco plant last fall, in part because it wants
to introduce a defined-contribution pension plan for new employees and
end indexing for the defined-benefit plan it inherited after
purchasing Stelco in 2007. That plan had a deficit of $1.2 billion.
Defined-benefit
plans, in which companies provide employees with a set payment in
retirement based on years of service, are becoming the exception in
Canada, because of their cost and the financial responsibility placed on
the corporations.
"They're excellent for employees," St. Germain said, "and very bad for shareholders."
Most
companies with such plans are running sizeable pension deficits, and
St. Germain said two years of strong equity markets have done little to
improve the solvency level because they've also featured rock-bottom
interest rates. (Mercer has the solvency index for Canadian plans below
60 per cent, down from almost 100 per cent in 2000).
At
a time when they should be getting more conservative, along with their
aging workforces, many plans still are carrying a high level of risk
because their managers feel it's the only way to generate the returns
needed to make up lost ground, St. Germain noted.
Public-sector
plans have the same problems but not the same pressure, since they can
pass on shortfalls to the taxpayer, as homeowners who received
increased property-tax bills recently can attest. St. Germain said.
"The challenge," he said, "will be to justify (those increases) to taxpayers."
Defined-contribution
plans put the onus on employees to manage their retirement funds,
something many are "completely incapable" of doing, St. Germain said.
It's not unusual to find young employees with less than 20 per cent of
their nestegg in equities and older ones holding 100 per cent in stock,
the exact opposite of what's advisable, he said.
Still, St. Germain isn't sold on recently-floated proposals to make retirement saving mandatory.
Paying
down debt or a mortgage or investing in your children's future might
well be a better option than an RRSP for many people, he said.
But
he urged Quebec to take action sooner than later in boosting the
contribution rates for the Quebec Pension Plan, since it's been known
for four years the provincial plan is headed for capitalization
problems. "At some point, you have to stop analyzing and take a
decision," he said.
I'm not
as concerned as Mr. St. Germain about pension funds (or individuals)
taking high risk in equities right now. The Fed's master plan remains
reflate and inflate at all cost and do everything it takes to avoid
deflation. So far, it's working, and while some fear major inflation is
on its way, I tell them to relax. What I see on its way is another major
bubble in stocks as banks and hedge funds get ready for the next big
ramp job. Everyone is so skeptical and bearish. Some are warning us that
we've seen this movie before.
Maybe, but I think stocks will keep grinding higher and all those
skeptical portfolio managers will be chasing indexes later this year.
Sure,
there will be pullbacks, but top funds will be buying them, navigating
through the volatility. And that's why I don't like this shift into
defined-contribution plans. The Utah pension model may look reasonable
but it's just based on what is going on in the private sector where the
retirement onus is increasingly being put on individuals. You can't
compare this to a defined-benefit plan where workers enjoy the peace of
mind and benefits that come with a professionally managed pension fund
that invests across public and private markets. But given the fiscal
woes that states face, I fear that the Utah pension model is going to
become the norm, and workers will lose out.
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UP DATE, UP DATE:
The front runner for the Republican nomination for President in 2012, former Congressman Newt Gingrich wants a Federal Bill passed (THIS MONTH NO LESS) to allow the states to declare bankruptcy so that won't have to pay pensions or bond holders. GO NEWT, we'll show those Greeks the what for on how to handle peskey pensions and bonds. This is great news, think of all the worthless dollars the Fed won't have to print now.
http://www.pionline.com/apps/pbcs.dll/article?AID=/20110110/PRINTSUB/301109976/1039/MostPopular
"...won't have to print."
...for mainstreet, anyway. The massive printing for politically connected banks that come hat in hand will surely continue unabated; all the while they keep the private worker vehemently indignant over a few of his pennies reaching the public worker.
Divide and conquer is so easy with you "No fair!Somebody fought to have it better than schmee" pillocks.
Race to the bottom bitchez!
Bonne Chance!
good question. the defined benefit pension has dodo written all over it.