You may have seen or heard that public employee pensions are "too expensive" and should be replaced. The non-profit National Institute on Retirement Security (NIRS) is among the many groups that do not agree.
Your defined benefit (DB) pension, NIRS argues, actually makes good fiscal sense for employers. Likewise, the retirement benefits funded by these plans are good for the economy, so everyone benefits.
NIRS recently completed a series of studies designed to measure the cost and impact of DB plans throughout the country. For employers, the Washington, D.C.-based group concluded DB plans deliver better "bang for the buck" than Defined Contribution (DC) plans, such as 401(k) plans. According to the report, over the course of a member's working life, "the embedded economic efficiencies of DB plans make them nearly half the cost of DC plans."
To prove the point, an example was cited of a 62-year-old with a target retirement benefit of $26,684. Under the DB plan, annual contributions of 12.5% of payroll would be required and $355,000 would need to be set aside by age 62. In contrast, the DC plan would require annual contributions of 22.9% of payroll and $550,000 would need to be set aside by age 62. As stated in the report, "The DB plan can do more with less, providing the same benefit for nearly $200,000 less per participant."
Here's how: DC plans are individual focused and, in order to ensure she/he does not outlive retirement savings, the individual must save enough to live to a very old age — typically 95 to 100. By contrast, a DB plan pools the contributions of many people, with a goal of saving enough for an average life expectancy for each member of the plan. An average life expectancy, which actuaries calculate with a high degree of accuracy, is much lower than 95 to 100 — meaning it is necessary to set aside significantly less per DB plan member.
Another significant advantage to DB plans is they historically achieve higher investment returns than individual DC accounts. This consistent pattern of higher returns is attributed to the ability of a DB plan to professionally manage assets at significantly lower fees. Higher returns translate into lower contributions toward retirement. The NIRS model shows an annual return of just 1% more results in a cost savings of 26% during a person's career.
Just as NYSTRS members count on their retirement benefits, state and local economies depend on pension dollars. DB retirees receive consistent,"recession-proof" incomes that are typically spent locally, NIRS points out.
In its report "Pensionomics: Measuring the Economic Impact of State and Local Pension Plans," NIRS found state and local pension benefit expenditures in 2006 were nearly $151.7 billion nationwide — an economic stimulus that supported more than 2.5 million American jobs. Those same benefits supported over $57 billion in tax revenue at the local, state and federal level.
The numbers are equally impressive here in New York. Of the more than 136,000 retired members and beneficiaries to whom NYSTRS provides services, approximately 75% live in New York State — meaning most of the nearly $5 billion paid out annually in benefits are poured back into the state economy.
NIRS found benefit payments "may be especially important in stabilizing local economies during economic downturns, because … pension income is guaranteed, so retirees need not worry about reducing spending with every dip in the stock market."
For more on the reports cited here, visit NIRS' website at www.nirsonline.org.
This article appeared in the Spring/Summer 2009 edition of Your Source and the Summer 2009 edition of Resource.