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Jane the Actuary Retirement

Forbes post, “Public Pension Roundup: Reform And Regression”

Originally published at Forbes.com on February 19, 2021

 

A round-up of reports across the country.

Florida: ending pensions for new employees?

From Tampa Bay Times,

“After years of discussions about the tricky issue of overhauling Florida’s retirement system for government employees, a Senate committee this week approved a proposal that would shut future workers out of a traditional pension plan.

“The proposal, sponsored by Senate Governmental Oversight and Accountability Chairman Ray Rodrigues, R-Estero, would require new employees as of July 1, 2022, to enroll in a 401(k)-style “investment” plan. Employees currently are allowed to choose whether to take part in the pension plan or the investment plan. . . .

“The pension plan was considered fully funded from the 1997-1998 fiscal year to the 2007-2008 fiscal year but then started running actuarial deficits, said Amy Baker, coordinator of the Legislature’s Office of Economic & Demographic Research. The deficits began during a major recession that hammered investments.”

Now, generally speaking, when an employer switches from a traditional pension to a defined contribution plan, this means a significant drop in plan benefits for employees. In Florida, that’s not the case — at least nominally not so: the employer contribution rate is the same for either type of plan, and varies only by employment class. (Of course, this doesn’t take into account any additional contributions needed to remedy funded status.) In addition, regular readers will know that I insist whenever the opportunity arises that state and local employees should participate in Social Security just as much as the rest of us do; as it happens, that is already the case for public employees in Florida. In addition, unlike the 8 year vesting of the traditional pension plan, the employer contributions to the defined contribution plan vest after only a year of service.

Kentucky: a new hybrid pension plan?

From WDRB,

“A bill creating a new pension tier for future teachers that will require them to pay more toward their retirement and work longer before they can earn full benefits passed the House Thursday.

“House Bill 258, sponsored by Rep. C. Ed Massey, moved to the House floor on a 14-4 vote and cleared the lower chamber hours later on a 68-28 vote. The measure, if passed, would put teachers and others covered by the Kentucky Teachers Retirement System hired after Jan. 1, 2022, into a new hybrid pension plan that includes foundational and supplemental benefits.

“Massey, R-Hebron, said the proposal would keep future hires from joining an already burdened and overtaxed’ defined-benefit pension system at KTRS, which actuaries expect will have unfunded pension liabilities totaling $14.8 billion and have 58.4% of the money needed to cover pension costs for current retirees and workers by fiscal year 2023.”

As described by WDRB as well as by the Louisville Courier Journal, the bill is not without opponents but there is a degree of consensus that reform is needed. However, unlike Florida, teachers do not participate in Social Security in Kentucky, so much more is at stake.

Illinois: pension spiking is back, baby

From The Patch, a local news publication in suburban Chicago:

“The Hinsdale High School District 86 board on Thursday approved a two-year agreement with the teachers union, including a “pension spiking” provision and relatively small pay raises.

“The agreement is retroactive to the beginning of the 2020-21 school year. Over the two years, teachers are expected to see base salary increases amounting to 2.2 percent.

“Under the agreement, the teachers will now get 6 percent annual increases in the last four years of their careers, up from the current 3 percent.

“This change will mean higher pensions for teachers, a practice that critics call ‘pension spiking.’ In Illinois, the state foots the bill for local districts’ pension contributions. So District 86 won’t suffer the long-term costs of the end-of-career pay hikes.”

Of course, the pension boosts won’t be free — but it will be Illinois taxpayers who will bear the cost, and quite substantially so. Receiving a guaranteed pay increase of 6%, rather than the current 3%, for four years, will mean one’s final salary is 12% higher than it otherwise would be, and one’s lifetime pension benefit (a four year average), 8% higher.

New York and Massachusetts: early retirement incentives on tap, boosting pension costs

From Spectrum News (Albany),

“Public workers in New York could have an incentive to retire early under a proposal by a pair of state lawmakers unveiled on Thursday.

“The bill backed by Sen. Peter Harckham and Assemblyman Tom Abinanti would create early retirement incentives for workers 55 and older who have 10 years of service with state or workers with 25 years of government service. A separate bill that covers early retirement for public workers in New York City was previously introduced. . . .

“To be eligible, a worker would have to be in a position that can be eliminated. . . .

“’It is better that longtime employees retire with guaranteed income than governments be forced to lay off employees who then seek unemployment benefits,’ said Abinanti. ‘Retirements in the short term will cut local payrolls, and in the long term, open jobs for those who want to work in government.’”

What is the incentive, specifically? Up to 3 years of additional service credit, based on current years of service, plus, for employers in “an optional retirement program,” additional retirement account contributions of as much as 45% of pay. In addition, employees at least 55 years old with 25 years of service would be spared the early retirement reductions that would otherwise apply — reductions which are as high as 27%, depending on age.

Not surprisingly, the bill comes with no actuarial analysis of the long-term cost of these benefit increases. And, although the plan is fully funded (based on the public plan funding methods), the new costs still must be paid by taxpayers.

Finally, according to MassLive, in Massachusetts,

“A bill that would allow teachers who are eligible to retire to purchase up to five years of service, age or a combination of the two in order to make room for new teachers has been backed by state Sen. John Velis, D-Westfield, and state Rep. Carol Doherty, D-Taunton.

“If approved, the bill known as ‘An Act to provide a retirement enhancement opportunity to members of the Massachusetts Teachers Retirement System,’ would be voted on by each city or town’s School Committee before teachers in those communities would be eligible. . . .

“The proposal was created by the Massachusetts Teachers Association as a way to provide an early retirement opportunity for teachers who have struggled to adapt to the remote teaching model and those who are at high-risk for COVID-19 and do not want to return to or continue teaching in-person while also giving opportunities to younger teachers in need of work.

“’With the money saved from allowing teachers with higher salaries and advanced degrees to retire early you could hire two teachers and then some,’ said Lori Lyncosky, president of the Westfield Education Association and a spokesperson for the Massachusetts Teachers Association which drafted the bill.”

This bill would increase the retirement benefit of an eligible teacher by adding 5 years to the teacher’s age and 5 years to the teacher’s service, or by some combination of each up to a total of 10 years. In principle, participating teachers would be required to “purchase” these credits based on a calculation of the costs; however, these calculations tend to understate the true cost, for instance, by the way assumptions are selected, or by using flat costs without regard to age, even if employees who “win” from this cost-setting are more likely to take the benefit.

It is, of course, an indicator of a broken salary schedule system at any particular school district if long-service teachers earn pay that’s double their new hire counterparts without adding double the value in terms of their experience, ability to mentor younger teachers, and the like. And this sort of incentive, even ignoring the question of whether the buy-in cost is fairly set, boosts the costs of pensions, which assume, in terms of such assumptions as retirement age, that even though teachers generally have very young retirement eligibility, a significant number of teachers will continue teaching to an older age, with the side benefit of less cost in pensions.

The bottom line: we have 50 states and 50 different pension systems, and significant differences in the reform-mindedness of those states’ legislators.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary General Interest, Retirement

Forbes post, “A ‘Living Wage’ Of $34,000? Bad Data, Or Bad Math, Will Stand In The Way Of Social Security Reform”

Originally published at Forbes.com on February 1, 2021

 

Yes, I have been calling for a comprehensive Social Security reform ever since I began writing at this platform. And, yes, that plan calls for a change from the current formula to a flat benefit for all, or, as I’ve also called it, a “basic retirement income.”

The catch, of course, is this: how do you decide what that right income level is?

The federal government gives us a number that seems reasonable enough by its name: the “poverty guideline.” This works out to $12,880 for a single person, or $17,420 for a household of two. True, you’d have to decide whether a household of two gets twice the single person’s benefit or only the two-person-household benefit, and you’d have to decide whether two people cohabitating count as a “single household” or not, but then the hard work of deciding what an “anti-poverty” benefit should be is finished.

Now, there’s a small wrinkle here: the federal government has two different calculations, the “guideline” and the “threshold”: the former is used for benefits eligibilities and the latter for counting how many people live in poverty — and, for what it’s worth, the threshold for an individual over 65 is $1,000 less than someone younger.

But the “poverty guideline” is ultimately just a metric used for other calculations — eligibility for Food Stamps is not “below the poverty line” but “below 130% of the poverty line.” And the calculation itself is based on the rather arbitrary assumption that people spend 1/3 of their income on food, so it’s not a particularly “scientific” measure of the amount of money needed to keep someone out of material deprivation.

But the promise President Biden has made with respect to expanding Social Security is to boost benefits to a minimum of 125% of the poverty level — and, it appears, to do so on an individual basis, so that households-of-two would get what works out to 180% of the poverty level. Is this enough?

Let’s do some more math: the current federal minimum wage is $7.25 per hour, which works out to $15,080 per year, based on a 40 hour week. Biden wants to boost this to $15.00 per hour, or $31,200, because, he says, that’s the level needed to prevent people from living in poverty (see his speech on his spending plan). Is it necessary to keep Social Security benefits in line with the minimum wage?

Lastly, there are (at least) two “Living Wage” calculators that purport to calculate the wage truly needed to cover the “basic needs” of families or a “subsistence living” income level.

The first of these is at MIT. To take some representative numbers:

In Peoria, Illinois, a single adult working 40 hours a week would need a wage of $10.70, or $22,256 per year. Two adults sharing expenses would need a total of $35,734.

In Chicago, those wages/incomes increase to $28,288 and $43,513, respectively.

(The “living wage” climbs even higher for parents; a single adult supporting 3 children would need to earn $39.31 per hour or $81,756 annually, according to their calculations, but that’s not really relevant when it comes to old-age/retirement benefits.)

The second of these was produced at the Economic Policy Institute. It does appear somewhat outdated, using 2017 data, but it produces considerably higher calculations.

Here, in Peoria, they calculate annual expenses of $33,994 for a single adult and $47,785 for a couple.

And in Chicago, they calculate a single adult needs to earn $36,917 and a couple, between the two of them, needs $50,006. Again, the numbers are even higher with children — $101,140 with three children.

But, it turns out, the basis for their calculations is questionable, at best.

According to the MIT documentation, the calculations assume that families prepare all their food at home (no eating out) according to the government’s “low cost food plan.” They calculate average health expenses based on typical premiums for employer health insurance and out-of-pocket costs from national government surveys. For families with children, they assume families elect the lower-cost option between family and center child care (but use average costs for each type).

But they base housing costs on the HUD Fair Market Rent estimates, that is, from HUD data for the 40th percentile rent for “standard quality units.” Why would a family living at a basic, subsistence level, rent an apartment at nearly the average rent for the area? They calculate transportation expenses based on average spending across all consumers, adjusting only to reflect purchasing used rather than new cars. They (appear to) calculate “other” expenses, again, by using average Americans’ spending on such items as clothing or personal care products.

The EPI documentation indicates other ways in which numbers they claim to be “basic expenses” are really just “average survey expenses.” For all metro areas, they assume parents choose daycare centers, despite their higher cost, and, again, spend the average amount on daycare. For transportation, they again use average American transportation spending, adjusting only to reduce vehicle miles travelled assuming less discretionary travelling. For “other” expenses, they again use survey data on actual spending rather than calculating necessary spending, with the primary adjustment being the assumption that families don’t spend any money on “entertainment” or the survey’s “other” category.

In addition, this calculation uses ACA/Obamacare exchanges to calculate health insurance costs but doesn’t take into account the Obamacare premium subsidies. And the tax calculations don’t appear to include Earned Income Tax Credits or Child Tax Credits (though this could be a result of calculating such high costs that the hypothetical family wouldn’t qualify).

Did MIT and EPI intentionally seek to inflate the living wage calculations? It stands to reason that groups advocating for boosts in the minimum wage would construct these calculators in a way to produce results that are invariably higher than minimum wage, but when they produce values that are so much in excess of what is reasonable, they weaken their case instead of strengthening it. After all, consider that the median individual income is $36,000; does it really make sense to say that the majority of Americans are living at a below-subsistence level?

Or is this a result of data limitations? A typical exercise in a high school Personal Finance course is to collect information on food costs, rent costs, and so on, from various sources, and construct a budget on this basis, but that’s not easy to replicate for families nationwide. One also imagines that there’s a certain fear that calculating such a spending budget might be misunderstood as casting moral judgement on the poor.

And, of course, these calculations are all based on spending for working families, not retirees, who are, as a practical matter, likely to spend less on clothing or other discretionary spending, who have the large majority of their medical spending covered by Medicare and the entirety covered by Medicaid for those below federal thresholds.

At the end of the day, this rabbit hole discussion shows that it is by no means easy to figure this question out — neither for those affected by the minimum wage nor for those affected by discussions of what the right level of Social Security benefit is.

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.

Jane the Actuary Retirement

Forbes post, “The Story Behind Illinois’ Latest Public Pension Liability Boost, And Why It’s So Very Illinois”

Originally published at Forbes.com on January 13, 2021

 

In the Chicago Sun Times on Monday, a headline: “Illinois Senate passes firefighter pension bill over mayor’s strenuous objections.”

“With the spotlight focused elsewhere [Illinois’ General Assembly is in the midst of its 5 day lame duck session], such as the Mike Madigan saga and the Black Caucus push for criminal justice reform, the Illinois Senate voted Monday to raise retirement benefits for 2,200 Chicago firefighters in a way that would saddle beleaguered city taxpayers with $850 million in added costs by 2055. The bill already had passed the Illinois House and now awaits Gov. J.B. Pritzker’s signature or veto.”

As a reminder, the Chicago Firefighters’ Pension Fund is 18% funded, with assets of $1.1 billion, and liabilities of $6.3 billion, according to its most recent actuarial report. If that $850 million represented an actuarial present value (that’s unlikely), it’d drop the funded status down to 16%. So what possible rationale could there be for this?

The bill was introduced by Sen. Robert Martwick, D-Chicago, at a point at which he was still a member of the state House. The bill removes a date of birth requirement in the provisions for COLA benefits, in which Tier 1 plan participants born before 1966 and meeting certain other requirements receive a COLA of 3% (noncompounded), and those born after, 1.5%.

The Sun Times reports that, although Mayor Lightfoot opposed the bill, Martwick’s rationale was sound, even adhering to actuarial principles:

“In late February, Martwick argued the ‘birth date restriction’ has already been moved five times as a way of masking the true cost to a firefighters pension fund with roughly 25% of assets to meet its future liabilities.

‘Remember, they have traditionally given that 3% simple COLA [Cost-of-living adjustment] to these firefighters. They’re going to get that. This just writes it into law. It’s really not adding cost. It’s making that cost transparent,’ Martwick said then.

‘If we don’t change the provision and we give them the more generous, 3% simple COLA, then payment on the back end will be enormous. There’s no doubt that would make the mathematical calculation of their payment go up. But what it will do is prevent us from kicking the can and making a huge disaster down the road. It’s making the law comply with what the actual practice is.’”

The article further cited a firefighters’ union spokesperson, Rob Tebbens:

“This is potentially an age discrimination issue because you’re basing the benefit off of an individual’s age and not their years of service. Based on their age, they’re gonna get a benefit that is less than a Tier 2 benefit.”

But Martwick is being disingenuous in his statements. Here’s some history:

There were indeed multiple increases to the age cut-off for the higher COLA, though I’m at a loss as to how there were five separate instances. Based on the plan legislative history in the valuation report, the age differential first came about in 1982, when the COLA was increased to 3% for all employees born in 1930 or earlier. In 1995, the birth date cut-off was raised to 1945; in 2004, to the present 1955.

Then, for 13 years, no further changes were made, perhaps finally recognizing that it was indeed not acceptable to boost benefits of such an underfunded plan. The years after 2004, after all, were a period when Illinois actually tried to restrain its pension costs, with the implementation of the Tier 2 pension system for workers hired beginning in 2011 and with an attempt at pension reform, later ruled unconstitutional, in 2013.

But in 2017, that effort at cost control ended. In that year, the birth date was adjusted to 1966 and retroactive benefits were given. And who was the sponsor of this legislation?

Why, then-Rep. Martwick. In fact, this bill was designed exclusively to provide this boost. The bill was passed by the House and Senate on July 1, 2017, vetoed by then-governor Bruce Rauner on September 22, 2017, and overridden by both houses on November 7, 2017. And there was so little notice taken of it that I can find no reference to it in either the Chicago Sun Times or the Chicago Tribune at the time.

But Martwick wasn’t finished. In 2018, he introduced a bill eliminating the age restriction, which died in 2019. And the bill which is now awaiting Gov. Pritzker’s signature was introduced immediately thereafter, in 2019. In both the 2017 bill and the new one, the benefit increase is retroactive for those who have already been receiving their pensions.

And the best part? The 2017 bill’s text includes this nugget:

“The changes to this subsection made by this amendatory Act of the 100th General Assembly are a declaration of existing law and shall not be construed as a new enactment.”

This is wholly undetached from reality, and suggests that even in 2017, they knew that this increase was unjustified and inappropriate for such a seriously underfunded plan.

It would be funny if it wasn’t so serious — a legislator claiming that “they’re going to do it anyway,” when it’s he himself who had been spearheading the increase, is exactly the sort of action that is, compounded over and over, the reason why Illinois is in exactly the straits it is in.

 

December 2024 Author’s note: the terms of my affiliation with Forbes enable me to republish materials on other sites, so I am updating my personal website by duplicating a selected portion of my Forbes writing here.