Saturday, December 23, 2017

"The traditional pension seems destined to be an artifact of U.S. labor history"-The Washington Post

…The notion of pensions — and the idea that companies should set aside money for retirees — didn’t last long. They really caught on in the mid-20th century, but today, except among government employers, the traditional pension seems destined to be an artifact of U.S. labor history.
“The first ones offered by a private company were those handed out by American Express, back when it was a stagecoach delivery service. That was in 1875. The idea didn’t exactly spread like wildfire, but under union pressure in the middle of the last century, many companies adopted a plan.
“By the 1980s, the trend had profoundly reshaped retirement for Americans, with a large majority of full-time workers at medium and large companies getting traditional pension coverage, according to Bureau of Labor Statistics data.
“Then corporate America changed: Union membership waned. Executive boards, under pressure from financial raiders, focused more intently on maximizing stock prices. And Americans lived longer, making a pension much more expensive to provide.
“In 1950, a 65-year-old man could be expected to reach age 78, on average. Today, that 65-year-old is expected to live beyond 84. The extended life expectancy means pension plans must pay out substantially longer than they once did.
“Exactly what led corporate America away from pensions is a matter of debate among scholars, but there is little question that they seem destined for extinction, at least in the private sector.
“Even as late as the early 1990s, about 60 percent of full-time workers at medium and large companies had pension coverage, according to the government figures. But today only about 24 percent of workers at midsize and large companies have pension coverage, according to the data, and that number is expected to continue to fall as older workers exit the workforce.
“In place of pensions, companies and investment advisers urge employees to open retirement accounts. The basic idea is workers will manage their own retirement funds, sometimes with a little help from their employers, sometimes not.
“Once they reach retirement age, those accounts are supposed to supplement whatever Social Security might pay. (Today, Social Security provides only enough for a bare-bones budget, about $14,000 a year on average.)
“The trouble with expecting workers to save on their own is that almost half of U.S. families have no such retirement account, according to the Fed’s 2016 Survey of Consumer Finances.
“Of those who do have retirement accounts, moreover, their savings are far too scant to support a typical retirement. The median account, among workers at the median income level, is about $25,000…”

What Defined-Benefit Pension Plans Contribute to a State's Economy:

·Defined-benefit pension plans have an economic impact of several hundred billion dollars each year and support several million American workers in their jobs; they contribute over a hundred billion dollars to annual local, state, and federal revenue, while reducing government expenditures; they also provide capital to the financial markets, and they deliver the same level of retirement income as an individual 401(k) type savings account at half the cost as a result of their professional asset management and better long-term investment strategies, particularly during challenging economic times(The National Institute on Retirement Security, NIRS).

·Defined-benefit pension plans are associated with far fewer American households that experience food privation, shelter adversity, and health care hardship and provide a bastion of hope and financial stability for millions of people in this country (NIRS).  Instead of attempting to eliminate defined-benefit pension plans, they should be advocated by everyone. 

·It is also true that state-funded pension plans are less expensive for Illinois taxpayers than Social Security and that Illinois taxpayers save hundreds of millions of dollars per year by not paying Social Security payroll taxes for 78% of all active employees in the five-State-managed plans.

·Defined-benefit pension plans have an economic impact of over $4 billion in the State of Illinois; their effect on Gross Domestic Product creates $2.38 billion; jobs created as a result of their existence: 30,448 (TRS, 2012).

·Defined-benefit pension plans contribute over $100 billion to annual local, state, and federal revenue in the U.S. and provide capital to financial markets (NIRS, 2012).


  1. The Teachers’ Retirement System was originally established to keep college-educated people working in a difficult and stressful job without the higher salary, benefits, and bonuses commonly rewarded to comparably-educated workers in the private sector.

    The State’s Retirement Systems in Illinois are not responsible for a State’s budget deficit or for the underfunding of public sector funds. State employees have contributed responsibly to their pension funds. Most state employees will not receive Social Security when they retire, and most of them will have worked for lower wages and without bonuses throughout their career for the promise of a guaranteed pension.

  2. "'‘The reality we face is that the nation's schools continue to struggle with a growing shortage of teachers, and that teachers are paid on average as much as 60 percent less than similarly educated professionals across the globe,’ says Diane Oakley, NIRS executive director. ‘Pensions play an essential role in recruiting and retaining our best and most experienced teachers. It's critical that states continue to leverage the magnetic effect of pensions to help students achieve at their highest potential.'"

  3. "The issue of states eliminating DB pensions and moving new hires into DC accounts in the hopes of lowering costs or addressing funding shortfalls often caused by states skipping their full actuarial contributions. But, the experience of states shows that such a change has the opposite impact with a DB to DC switch increasing retirement costs for employers and taxpayers in the immediate future" (National Institute of Retirement Security).

  4. “The 401(k) is no closer to working today than it was all those years ago, despite 35 years of tweaking (for example, should we match in company stock?). The system remains inefficient, and financial advisors still can’t tell people how much they can safely withdraw per year in retirement. The 4 percent rule of thumb (meaning a half-million dollars in retirement savings would produce only $20,000 in annual retirement income before tax) could take out too much money from the retirement nest egg in a poor stock market, according to recent studies.

    “The inefficiency of 401(k)s has been proven repeatedly in study (1988-2004 data) after study (1995-2011 data) after study (1990-2012 data), by researchers and even corporate consulting firms. Each study shows that traditional pension funds outperform 401(k)-type plans, meaning you get more benefit per dollar invested.

    “During the years these studies covered, 401(k) plans had a structural advantage over pensions with a less mature demographic profile. However, in the next 35 years, those who are retired, or nearing retirement, will have to invest more conservatively. These near-retirement individuals tend to have the accounts with the largest balances, too..." (Bloomberg Pension and Benefits Blog).

  5. "Defined Benefit Pension Plans are not structurally more cost-effective than Defined Contribution Savings Plans. NIRS data and empirical evidence show otherwise. DB plans can deliver a target retirement benefit at half the cost of a DC account.

    "DC plans do not have similar investment returns as DB plans; moreover, analysis fails to use public pension data, and it conveniently ignores asset allocation shifts in private sector pensions due to 'frozen' pensions.

    "DC plans can offer annuities, but fewer retirees choose annuities because they are costly.

    "Though pension debt is a significant cost driver for DB plans [especially if the plans are not fully funded each year], this is not relevant to the economic efficiency 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.

    "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 efficiency of public pensions relies on the state DB plan to provide lifetime income" (National Institute of Retirement Security).

  6. This study, conducted by Teachers" Retirement System of Illinois, used benefit statistics from February 2015:

    • Eighty percent of the System’s 89,817 total benefit recipients live in Illinois.

    • The $3.8 billion in pensions and benefits paid to Illinois residents is 83 percent of the total pensions and benefits distributed by TRS annually. The statewide economic impact of TRS pensions and benefits can be measured in real terms:

    This is the overall measure of economic activity in Illinois stemming from TRS pensions and benefits. It includes all TRS payments, salaries earned in those jobs, and increases in the state’s Gross Domestic Product.

    JOBS SUPPORTED – 41,725
    This is the total number of full-time jobs supported by the $3.821 billion in TRS pensions and benefits pumped into the Illinois economy.

    These are the total salaries earned by persons employed in Illinois jobs that are fueled by TRS benefit payments.

    This is the amount added to the Illinois Gross Domestic Product – the total value of goods and services produced within Illinois – due to TRS pension and benefit payments.

  7. “…Who comes first, the investors or the person who manages their money? That question is crucial for any investor. But it poses a special challenge for retired firefighters, police officers, teachers and other employees who may not know that their retirement money is being held in private equity funds.

    “These are opaque and costly investment vehicles that borrow money to buy companies and sell them, ideally, for a profit. The secrecy under which this $3.5 trillion industry operates has essentially required millions of people whose pensions are invested in these funds to simply trust that they are being treated fairly.

    “Yet the funds impose fees under terms that create conflicts of interest between investors and general partners who run private equity firms. A little-known practice involves discounts that the firms obtain from lawyers and auditors but do not always share fully with investors. A dive into regulatory filings over the last month revealed that 12 private equity firms said they had actual conflicts of interest in connection with such discounts, while 29 more described potential conflicts. Altogether, the 41 firms oversee almost $600 billion in client assets, documents show. The disclosures appear in documents the firms filed with the Securities and Exchange Commission as registered investment advisers…” (When Private Equity Firms Give Retirees the Short End by Gretchen Morgenson, New York Times, 2015).

  8. “...The pension ‘reforms’ being pushed by conservative activists would slash retirement income for many pensioners who are not part of the Social Security system. Additionally, the specific reforms they are pushing are often more expensive and risky for taxpayers than existing pension plans. Whether ‘cash balance’ schemes or 401(k)-style defined contribution plans, many of the pension ‘reforms’ being championed by conservative activists risk incurring more costs and increasing risks for taxpayers…” (The Plot Against Pensions by David Sirota, 2015).

  9. “…The truth is this: the concept of a do-it-yourself retirement [401 (k)] was a fraud. It was a fraud because to expect people to save up enough money to see themselves through a 20- or 30-year retirement was a dubious proposition in the best of circumstances. It was a fraud because it allowed hustlers in the financial sector to prey on ordinary people with little knowledge of sophisticated financial instruments and schemes.

    “And it was a fraud because the mainstream media, which increasingly relies on the advertising dollars of the personal finance industry, sold expensive lies to an unsuspecting public. When combined with stagnating salaries, rising expenses and a stock market that did not perform like Rumpelstiltskin and spin straw into gold, do-it-yourself retirement was all but guaranteed to lead future generations of Americans to a financially insecure old age. And so it has…” (401k s are a sham by Helaine Olen, 2014).

  10. "…Adherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it. The United States Supreme Court made the point powerfully nearly a century and a half ago when it struck down as unconstitutional President Lincoln’s use of executive authority to suspend the writ of habeas corpus during the Civil War, a period of emergency that, by any measure, eclipsed the one facing our General Assembly today. In rejecting the government’s argument that wartime concerns justified the curtailment of the constitutional protections, the Supreme Court employed language which seems appropriate to this case:

    "'Time has proven the discernment of our ancestors; for even these provisions, expressed in such plain English words, that it would seem the ingenuity of man could not evade them, are now, after the lapse of more than seventy years, sought to be avoided. Those great and good men foresaw that troublous times would arise, when rulers and people would become restive under restraint, and seek by sharp and decisive measures to accomplish ends deemed just and proper; and that the principles of constitutional liberty would be in peril, unless established by irrepealable law. The history of the world had taught them that what was done in the past might be attempted in the future. The Constitution *** is a law for rulers and people, equally in war and in peace, and covers with the shield of its protection all classes of men, at all times, and under all circumstances. No doctrine, involving more pernicious consequences, was ever invented by the wit of man than that any of its provisions can be suspended during any of the great exigencies of government. Such a doctrine leads directly to anarchy or despotism ***.'" (Emphasis in original.) Ex parte Milligan, 71 U.S. 2, 120-21 (1866). (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants) Opinion filed May 8, 2015).

  11. The Illinois Supreme Court Will Continue to Protect Public Employees' Pensions:

    2015 DORIS HEATON, et al. v. PAT QUINN, in his capacity as Governor of the State of Illinois, et al. (May 8):

    “…The concerns of the delegates who drafted article XIII, section 5, and the citizens who ratified it have proven to be well founded. Even with the protections of that provision, the General Assembly has repeatedly attempted to find ways to circumvent its clear and unambiguous prohibition against the diminishment or impairment of the benefits of membership in public retirement systems. Public Act 98-599 is merely the latest assault in this ongoing political battle against public pension rights. As we noted earlier, through that legislation the General Assembly is attempting to do once again exactly what the people of Illinois, through article XIII, section 5, said it has no authority to do and must not do… The judgment of the circuit court declaring Public Act 98-599 to be unconstitutional and permanently enjoining its enforcement is affirmed” (In re Pension Reform Litigation (Doris Heaton et al., Appellees, v. Pat Quinn, Governor, State of Illinois, et al., Appellants, May 8, 2015).