Tuesday, August 18, 2015

National Institute on Retirement Security Says Manhattan Institute Study on Defined-Benefit Plans Is Irrelevant, Highly Flawed…

“A new study released last week is so fundamentally flawed that it is irrelevant to the retirement security debate. The new study, Defined-Contribution Pensions Are Cost-Effective, is authored by Josh McGee, a senior fellow at the Manhattan Institute. It claims to assess public sector retirement plans but uses private sector pension data that is not comparable, which invalidates the findings.

“‘It is perplexing why the study uses the wrong data in the analysis. This major miscalculation renders McGee's study misleading and useless. This is just one of the many problems with his study,’ said Diane Oakley, NIRS executive director. ‘The study isn't even an apples to oranges comparison - it's apples to nothing. Also troubling is that the study's title is not supported by any numbers in the report to demonstrate the cost-efficiency of a defined contribution plan.’ Oakley said.

“NIRS stands by its research, Still a Better Bang for the Buck: Update on the Economic Efficiency of Pension Plans, which is inaccurately criticized in the McGee study. The numbers in the NIRS study add up, and it remains a credible and accurate retirement study. It was conducted by a respected pension actuary with both public and private sector experience; it is based on empirical research on investment behaviors of individuals; and was carefully reviewed by a committee of experts.”

from NIRS, The McGee study:
  1. Claims that DB plans are not structurally more cost-effective than DC plans. But, NIRS data and empirical evidence shows otherwise. DB plans can deliver a target retirement benefit at half the cost of a DC account.
  2. Says DC plans get similar investment returns as DB plans. But, the analysis fails to use public pension data, and it conveniently ignores asset allocation shifts in private sector pensions due to “frozen” pensions.
  3. Indicates the DC plans can offer annuities. But, few offer annuities and even fewer retirees choose annuities because they are costly. The author conveniently ignores these costs or seeks to buy them from the DB plan.
  4. Says pension debt is a significant cost driver for DB plans. But, this is not relevant to the economic efficiencies of DB plan – just like funding shortfalls and asset leakage are not relevant to measuring the efficiency of DC accounts to deliver adequate income replacement.
  5. Indicates DC plans are a good retirement security option. DC plans can be well designed, but the one public DC plan that might come close to the cost efficiencies of public pensions relies on the state DB plan to provide lifetime income. Luckily, this state reopened the DB plan to new employees and most of them actively make elections to join the DB pension.

For a Contrast between a Defined-Benefit Pension Plan and a Defined-Contribution Savings Plan, click here.

State Auditor Report Says Pensions More Cost Efficient: 

“The Colorado State Auditor's Office released a report last month examining Colorado's public employee pension plan and comparing it to alternative public and private sector retirement savings options, including Social Security. The study found that the pension plan is ‘more efficient and uses dollars more effectively than the other types of plans in use today. The study also found that the state cannot eliminate the unfunded liability by moving new hires to an alternative plan.

“This independent analysis is consistent with two recent NIRS studies:
  • Still a Better Bang for the Buck finds that the economic efficiencies embedded in pensions enable them to provide the same retirement income as an individual account at about half the cost.
  Read the auditor's report here. 

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