DiNapoli: Don’t Race to Dismantle DB Plans

March 6, 2012 (PLANSPONSOR.com) - Media accounts make it seem public pensions are financially insecure and costly but, while some state and local plans have become underfunded in recent years, most are sustainable for the long term.

Speaking at the National Institute on Retirement Security’s (NIRS) third annual retirement policy conference, Thomas DiNapoli, New York state comptroller and sole trustee of the $133.8 billion New York State Common Retirement Fund, noted that, as are legislatures in other states, New York is considering a move to a defined contribution plan for state workers. DiNapoli said that’s a bad idea. “In their relatively short 31 year history, 401(k)s have proven to be woefully inadequate for those who depend on them for retirement income,” he stated, adding that they were designed to be supplements to defined benefit (DB) plans and Social Security.  

DiNapoli argued that 401(k)s cost more for taxpayers and employees in the long run, saying that research has shown DB plans cost 46% less. He said individuals investing in 401(k)s pay higher fees and get lower rates of return than in DB plans. He also noted that individuals in 401(k)s must save at a rate to make income last into their 90s and must invest based on their age, whereas DB plans invest based on the market and the average mortality of members.  

DiNapoli added that NIRS research released earlier in the day shows the confidence that workers have in pension income helps boost the economy (see “Pension Spending Supports Jobs and Economic Output“). In New York, 77% of retirees continue to live in the state. DiNapoli suggested this is in part because public workers are secure about their retirement income. Retirees contribute $6.5 billion in spending and $9.5 billion in economic impact to the state.  

“The erosion of retirement security will have a far more costly impact than the cost of DB pensions,” DiNapoli stated.  

According to DiNapoli, now is the time for a national commission to be established to ensure retirement security. The commission should identify strategies for maintaining DB plans, identify practices for pension fund trustees when investing, require training for fiduciaries, compel payment of pension contributions and ensure adherence to actuarial standards and prevention of fraud and abuse. The focus should be to put a retirement system in place to allow the middle class to retire with dignity, DiNapoli said.  

The commission should also consider whether to open public pensions to employees of private industry employers, he suggested.  

“Financial institutions were rescued during the 2008/2009 crisis and pension plans were not, but don’t race to dismantle them. We need to support plans that have been proven to work, ensuring their strength and sustainability,” DiNapoli concluded, adding that solutions will take years to take hold, so failure to act now will result in the suffering of more future retirees.

Seeing DBs Differently   

DiNapoli contended the underfunding of public pension plans is in part due to the short-sightedness of benefit committees when making decisions about investments and increasing benefits. A well-run plan such as the Common Retirement Fund has weathered all financial storms over nine decades, DiNapoli said.  

He noted that each year the system sets contribution rates for state and local government employers, and the governments made the payments, never skipping them even in good economic times. The system’s investment expertise helps it take advantage of market opportunities, and its diversified portfolio helps manage risk. In addition, transparency and adherence to actuarial standards helps the fund stay accountable to the public.   

Media reports say public pension systems are eating up state and local budgets, but DiNapoli cited research from the Center for Retirement Research at Boston College (CRR) that found pension contributions from state and local government employers average 3% to 8% of budgets. DiNapoli said, in New York, its 2.7%.  

“Strong pension funds are cost effective and the vast majority of benefits are paid by investment returns,” he added. In New York, 83% of retiree benefits are paid from investment returns.  

News reports have also focused on “massive” pensions public DB plans pay out. DiNapoli pointed out that in New York, $8.5 billion in benefits are paid to 385,000 retirees and beneficiaries; less than 1% received benefits of $100,000; and the average benefit is $19,151. Seventy-six percent of retirees receive less than $35,000, he added.