The Anchor Rising Pension Simulation

James Cournoyer‘s observation, made in his May 5 Projo letter-to-the-editor, that contributions from employees into the Rhode Island public pension system don’t come anywhere near to covering the amount that the system is obligated to pay out, shouldn’t take anyone by surprise. Pensions (and defined contribution plans, for that matter) work on the principle that contributions + investment growth = mo’ money, given time. The investment component cannot be neglected in any attempt to determine reasonable payouts.

The basic assumptions that go into building a pension fund are that…

  1. Every year, an employer and employee will put some percentage of an employee’s salary into a “kitty” of eventual retirement funds.

    (I can have a bit of an argument with multiple sides in the pension reform debate here. Especially when participation in a pension plan is mandatory, I don’t see much point, from a fiscal perspective, in separating the “employer” contribution from the “employee” contribution.)

  2. As the employee’s salary grows each year, so do the contributions to the kitty.
  3. The total in the kitty also grows (hopefully) through investment.
To get a sense of what the numbers are, we can start with the assumptions in Mr. Cournoyer’s letter, an initial salary of $30,000 and annual raises of 3.25%. We’ll also need to assume a figure for total employer-plus-employee contributions to the pension fund (I’ll use 20%, for starters), and an annual investment growth rate, (I’ll use 7%, relative to what’s already in the kitty from the previous year plus one-half of the current year’s contribution).

Under those conditions, after 20 years, Mr. Cournoyer’s hypothetical employee will begin with about $287,000 to draw on for his or her retirement…



























Age3.25% RaiseSalary20% Annual
Contribution
7.0% Annual
Growth
“The Kitty”
25 $0 $30,000 $6,000 $210 $6,210
26 $975 $30,975 $6,195 $652 $12,420
27 $1,007 $31,982 $6,396 $1,093 $19,267
28 $1,039 $33,021 $6,604 $1,580 $26,756
29 $1,073 $34,094 $6,819 $2,112 $34,940
30 $1,108 $35,202 $7,040 $2,692 $43,871
31 $1,144 $36,346 $7,269 $3,325 $53,603
32 $1,181 $37,528 $7,506 $4,015 $64,198
33 $1,220 $38,747 $7,749 $4,765 $75,718
34 $1,259 $40,007 $8,001 $5,580 $88,233
35 $1,300 $41,307 $8,261 $6,465 $101,815
36 $1,342 $42,649 $8,530 $7,426 $116,541
37 $1,386 $44,035 $8,807 $8,466 $132,497
38 $1,431 $45,467 $9,093 $9,593 $149,770
39 $1,478 $46,944 $9,389 $10,813 $168,456
40 $1,526 $48,470 $9,694 $12,131 $188,658
41 $1,575 $50,045 $10,009 $13,556 $210,483
42 $1,626 $51,672 $10,334 $15,096 $234,048
43 $1,679 $53,351 $10,670 $16,757 $259,478
44 $1,734 $55,085 $11,017 $18,549 $286,905


Now, our hypothetical retiree begins drawing out of the pension fund at age 45 after 20 years of contributions. According to Mr. Cournoyer, the rules are that…

  1. The initial pension amount taken is 50% of the average of the highest (in this example, the last) five years of salary.
  2. There is a 3.0% cost-of-living adjustment on the size of the annual withdrawals.
But also, there’s a third rule we need to add — a rule, I suspect, often forgotten in initial perceptions of how pensions work — that growth (hopefully) continues in the kitty throughout the retirement drawdown period. In particular, we’ll assume the same 7.0% growth used in the building phase continues, in this case calculated relative to last year’s kitty minus one-half of the current year’s withdrawal amount.
The quantity to be concerned about is not when the money-out equals employee-contributions-in, but when the total in the kitty, contributions plus investment growth minus distributions, falls below zero. At that point, our hypothetical employee’s retirement is no longer self-funded and additional money must be found to directly cover the pension cost. (There are two basic sources of this additional money. One, of course, is tax revenue sent directly to pensioners. The other is money already in the fund from people who die before they collect everything their contributions + growth would pay for. Sometimes I think that actuarial science, rather than economics in general, should be called “the dismal science”).

Anyway, here’s what happens to the fund based on Mr. Cournoyer’s assumptions …





















Age3.0% COLAAnnual
Pension
7.0% Annual
Growth
“The Kitty”
45 $0 $25,862 $19,178 $280,221
46 $841 $26,703 $18,681 $272,199
47 $868$27,571 $18,089 $262,718
48 $896 $28,467 $17,394 $251,645
49 $925 $29,392 $16,586 $238,840
50 $955 $30,347 $15,657 $224,149
51 $986 $31,333$14,594 $207,410
52 $1,018$32,352$13,386 $188,444
53 $1,051$33,403$12,022 $167,063
54 $1,086 $34,489$10,487 $143,062
55 $1,121 $35,610$8,768 $116,220
56 $1,157 $36,767$6,849 $86,302
57 $1,195 $37,962 $4,712 $53,052
58 $1,234 $39,196 $2,342 $16,199
59 $1,274 $40,469 0 -$24,270

I used Mr. Cournoyer’s numbers, not because they are necessarily realistic (for state employees and teachers, for instance, I don’t think that 50% pensions for 20 years of service are possible, and under some recent reforms, the COLA increase may not be so aggressive), but because they simultaneously illustrate…

  1. That with solid investing, it is reasonable for a pensioner to expect to get many multiples of his or her contributions back, but also…
  2. That many multiples may not be enough to cover the cost of an early retirement. Given that the average lifespan in the U.S. is around 75 years, a pensioner in the system above would require direct funding from some other source to pay for his or her retirement for about 15 years.
So, before going on and trying to figure out what is or isn’t working in the pension system, are we anywhere close to having a method we can agree upon for analyzing it?
(Also, I can tinker with the numbers, if people are interested in seeing the results under other conditions).

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Bob Walsh
Bob Walsh
13 years ago

Good job, Andrew – excellent work, now we are getting somewhere. I used the same framework to present to the Pension Study Commission.
A few very important notes – our pension system uses 8.25% return (and has averaged over 10%) – most probably use 7.75% to 8.0%. Also, on the teacher and state employee side, a few very important modifications – under “Plan A” one must work (and contribute) 28 years to get a 60% benefit, 35 years to get 80%, and the COLA starts the January of the third year after retirement (assume a 2.5 year delay for teachers, most of who retire in June.). Under “Plan B”, a minimum age of 59 is instituted, and one must work 38 years to get a maximum benefit of 75%, with a three year delay until the COLA starts. As I have stated numerous times before, the Plan B scenario pays for itself with minimal contribution from management (and an an individual would not get those returns investing on their own.) Finally, to be fair, I would run the average lifespan up to age 82 or 83, as folks who make it to retirement are likely to live that long according to the actuarial charts (remember,the overall average lifespan is different than life expectancy after one reachers a certain age.)

Greg
Greg
13 years ago

Imagine how much money would could save if we just stipulated that you couldn’t collect your pension until you reach a retirement age tied to the social security age.

John
John
13 years ago

Greg:
Stop applying logic, you’re distorting the rhetoric!
BTW, imagine if social security had moved the eligibility age to reflect the ever increasing mortality? Maybe SS adn Medicare wouldn’t be broke either.

michael
michael
13 years ago

Most public employees are not accountants. I can barely add. When I was hired I took the pension plan offered and have paid (mandatory) 9 1/2% every week. This doesn’t make me a thief, pig, thug, robber, selfish, socialist criminal as some would try to lead people to believe.
I’ve been part of the city of Providence’s pension system for seventeen years and this is the first time I’ve actually understood the numbers. Thanks Andrew.
When I hear about the pension liability it is MY FUTURE being put in jeapordy, not just another unfair tax increase. I understand the rage from privately employed citizens but think they are putting the blame for this mess on the wrong people.
Incidentally, I would support a higher minimum retirement age before collecting a pension.

George Elbow
George Elbow
13 years ago

Andrew – You, as well as Bob Walsh, seem to have missed Mr. Cournoyer’s very straightforward point, which is that our Public Empoyees, particularly under the scenario as laid out by Ms. P.E. Hanson, receive a ridiculously generous benefit at minimal cost to the employee and SIGNIFICANT cost to the taxpayers. Even your numbers demonstrate Mr. Cournoyer’s point, as after just 15 years, the Pension Fund (i.e. the Kitty) is running a deficit. Continue your table out to age 75 (or worse, age 83 as Bob Walsh suggests) and the deficit (i.e. the excess of benefits paid versus the employee’s minimal contributions plus the “assumed” earnings) grows to over $800,000! And make no mistake, there are many RI public employees collecting pensions for 30 years or more. The bottom line is that, as Mr. Cournoyer noted, the Benefits paid to our public employees is simply unsustainable under any scenario. Even you admit that it is a Ponzi scheme when you acknowledge that the shortfall has to be coverered by the next wave of workers. But eventually, the music stops and the taxpayers are left holding the bag. The unsustainability of these plans is not news. Big Steel and Big Auto figured this out long ago. The once mighty American Automotive industry has been brought to its knees because, like the RI General Assembly, they refused to say “no” to the Unions. The Bob Walsh’s of the world know this to be true, but refuse to open the eyes of their uniformed union members, much to their eventual detriment. Also, I find it interesting that you assume the fund will ALWAYS accrue earnings (the S&P 500 is actually lower today that it was at the end of 1999) and, more importantly, since the employee suffers no risk relative to the earnings… Read more »

Bill
Bill
13 years ago

Michael,
You are right. Your lack of understanding of how the Pension system works does not make you a “pig”.
Rather, you are merely a pathetic sheep, blindly following the herd, led by shepherds like Bob Walsh.
How big a Pension Deficit do you need to start asking questions and demanding answers? Is $5 billion not enough?
How many more 40+ and 50+ year old people have to retire before you ask “gee, how is that possible. How can the math possibly work?”
Do you really believe that contributing just 9.5% of your salary for 20 or 25 years could possibly cover paying you a 50% or more pension, based on your highest 3 or 5 years for 20 years or more, plus cost of living increases?
Wake up! Why do you think the state is on the verge of bankruptcy? Wouldn’t it be nice of Bob Walsh was honest with his membership and explained the economic realities of the unsustainable benefits that have been bestowed upon his flock?

Larry
Larry
13 years ago

Andrew- You wrote: “I don’t see much point, from a fiscal perspective, in separating the “employer” contribution from the “employee” contribution.” The reason for seperating the two, as I suspect Mr. Cournoyer did, was to clearly illustrate to the less than informed public employees what a sizeable benefit they are receiving in comparison to what they contribute. If you seperated the two amounts, your employee contribution amount would equal exactly what Mr. Cournoyer said they would be, which was $75k. Too many public employees, like Michael, are clueless and actually believe the spin put forth by the union leadership that their contributions (and earnings, if they materialize) cover most of the pension benefit they receive, when if fact, it doesn’t come even close, no matter how rosy your assumptions are. Our public employees need to be educated on how over the top these benefits are and how costly they are to the taxpayers, who quite frankly, can not bear to carry any more of them on their shoulders. You miss an opportunity to inform and educate our misinformed public employees when don’t break out the minimal cost to the employee as compared to the taxpayer; when you don’t carry forward the payments past the years in which the deficit begins; when you assume the fund will continually generate earnings, which by the way, both the employee and the taxpayer lose the ability to earn income on the funds they put into the pension system. But it is only the taxpayer that carries the risk associated with those earnings, as the employee gets their benefit regardless of how the fund performs. Also, for the Michaels of the world that say their participation and contributions into the pension plan is “mandatory” as if it is somehow a burden for the employee, well… Read more »

Bob Walsh
Bob Walsh
13 years ago

Hmmmm . . . .
Faced with the inevitable factual analysis, using the methodology outlined by Andrew and based on the real figures impacting current teachers and state employees, panic sets in among the union bashers on this blog. What will they do when it turns out that the facts are on my side and defend my position? Admit their mistakes, or resort to insults. In this case, sadly, it is likely that past performance will predict future behavior.
Please run the Plan B numbers Andrew, they won’t believe it when I do it!

George Elbow
George Elbow
13 years ago

Bob,
What facts are you looking at?
Andrew’s analysis demonstrated the very issue highlighted by Mr. Cournoyer.
When a teacher can begin collecting a 60% pension after just 28 years (age 51 if they start working at age 23), the numbers are worse. Using your age figures (83 life expectancy), a teacher could easily earn a pension for 30 years under this scenario …more years than they worked.
Bob, there is no scenario you can create in which the math will work. That is why we have a $5 billion pension deficit. It is also why your union members must join the real world and move to defined contribution plans. Then, you can take all the benefit (or detriment) you want with respect to “earnings”.
Give it up Bob, the taxpayers have finally figured it out. The benefits you demand for your union are unsustainable. Even 17 year union-man “Michael” now gets it.
Your insistance on pretending that the laws of economics don’t apply to union members will only hurt your membership in the long run.
In terms of “resorting to insults”, you must be referring to your sidekick …that little clown Patrick Stalin Crowley.

Mike
Mike
13 years ago

No need to argue with the Stalinists. The laws of economics are not so slowly catching up to their welfare/union kleptocracy.

Mike
Mike
13 years ago

I should add in fairness that the teacher’s pensions are not the main problem. Raise the age to 62 and cut the percent of salary just a little and you can probably balance them.
The real problem is the ruinous “retire at 41” municipal pensions and the “disability” scam. Please consult Rene Menard for details!

Tom W
Tom W
13 years ago

>>Please run the Plan B numbers Andrew, they won’t believe it when I do it!
And what about the “Plan A’s” (or whatever the pre-1995 hires are called)?
The bottom line is that the pension should be immediately frozen for ALL state employees / teachers, and ALL converted to a 401k-type plan with a match comparable to those offered in the private sector.
The few private sector employers left who have pension plans have mostly frozen them and converted. Time to bring that to the public sector too – that’s the reality of today.

chuckR
chuckR
13 years ago

By all means, Andrew, please show us the Plan B numbers. (After all, what are we paying you for?) Let’s also see a rule of 90 calculation – you get the pension when years in and age sum to 90. And then how about a rule of 110 – which is approximately the combination of age and eligibility for social security. Yes Mr. Walsh, I know thats unfair as SS contributions are 12.4% vs. the 20% ostensibly contributed in the example, but I just had to point out what happens in the real world. The rule of 90 calc for Andrew’s example would certainly yield some different results – and its still way more generous than most of us get, in compensation for the extra contributions made (or not made, thanks to our Democrat solons). No matter how you look at it, collecting a pension before a more typical real world retirement age is, as the example above shows, unsustainable.

Bob Walsh
Bob Walsh
13 years ago

George Elbow,
You are tilting at a windmill that has been moved. Did you miss the part where the pension system was changed three years ago? Did you miss the part where the teachers and state employees always made their contributions, but the state did not?
Run the numbers. Start at age 22, work 38 years, contribute 9.5% of salary, invest it at 8.25%, retire at 60 and get the 75% maximum benefit, get the 3% COLA starting 3 years later, die at 83. Then backwards adjust and add the needed management contribution to make the system work. And you will find that it is less than what most private sector firms contribute to 401-k’s.
Then apologize, to Michael if not to me.

George Elbow
George Elbow
13 years ago

Bob, You must think I’m as uninformed as your members. I did do the math. Here it is, try to follow: One: A teacher who earned approximately $31,500 in 2004 will be earning approximately $78,000 in their 10th year. This is based on an existing contract. The yearly rates over the first 10 years are as follows: $31,500, $34,300, $37,550, $40,929, $45,150, $49,850, $55,950, $62,325, $70,000, $78,100. Two: It is assumed that the teacher will then receive 3.25% raises for the remaining 28 years, bringing their salary in year 38 to $191,213. The average of their last 5 years will equal $179,550. Three: A 75% pension in year 1 – 3 will equal $134,661 [75% of 179,550]. It will then grow at 3% per year for the next 20 years,at which point the teacher will have collected a pension for 23 years. The annual pension payment in year 23 will have grown to $243,000. The total amount that the teacher will have collected in pension payments over the 23 year period will be $4,130,934! Four: The teacher will have contributed at a rate of 9.5%, for a total contribution of $389,463 over the 38 years in which they contributed. Five: Assuming the employee contributions earn 7% (as Andrew assumed), the total earnings after 38 years would have been $929,454 for a total combined “kitty” of $1,318,917 [employee contributions of $389,463 plus 7% earnings of $929,454). Six: Then, that total kitty of $1.3 million would continue to earn 7% as the balance declined to fund the employee’s lucrative pension payments. The total additional earnings would be approximately $435,000. The earnings would cease around year 9, as the employee pension payments would, at that point, exceed the employee contributions plus earnings. So, Bob, we have a teacher that works 38 years, contributes… Read more »

michael
michael
13 years ago

Thanks Bob. These folks will never get it. They don’t read our comments, only pick through them looking for something to dispute. I don’t participate here for their sake, rather the rational people who read this blog and give what is written here serious thought rather than foolish insults. Most people who read blogs don’t comment.
I’ve been an active participant on Anchor Rising for over a year. I’ve ‘paid my dues” so to speak. These johnny come latelys will grow tired of their stale insults soon and go away.

Tired of Bob
Tired of Bob
13 years ago

Bob Walsh,
You just don’t get it.
You say: “you will find that it is less than what most private sector firms contribute to 401-k’s.”
Putting aside the fact that your numbers are wrong, as usual, the difference is that the private sector employee who has a 401k has no guarantees, whereas your entitlement minded union hacks that you make a living off of are GUARANTEED of receiving a pension payment that far out paces anything a 401k could cover, regardless of how the market performs.
Here is a little news flash for you Bob: when something has a gaurantee attached to it (i.e. no risk), the return should be less, not more!
Do you really think anyone’s 401k in the private sector could payout 75% of their highest 3 or 5 years for 20 years or more?
Who are you trying to kid? You’re a joke and it is people like you that are ruining this state.

Bill
Bill
13 years ago

Michael,
You said – I’ve ‘paid my dues” so to speak.
I guess what you are trying to say is that your are “entitled” to something? What a suprise.
Do yourself and the state a favor, go take a remedial math lesson so you’ll understand what is being discussed here.
The only thing that is insulting is the way Bob Walsh and his croines insult our intelligence.
Hope that didn’t hurt you feelings too much.

Greg
Greg
13 years ago

Wow, Bill. Throw wild generalizations much?

Bill
Bill
13 years ago

Bob Walsh – will we have to wait until tomorrow for you to issue an apology to George Elbow, who clearly demonstrated your continued ineptness using your own “facts”.
Greg – the answer to your question is no, I generally don’t make generalizations. But then again, when your dealing with union hacks, they are generally all the same …entitlement minded and not too bright. Wouldn’t you generally agree?

Bob Walsh
Bob Walsh
13 years ago

When confronted with actual facts, the uninformed resort to name-calling and hatred.
At least it helps to remind folks why they need a union. No wonder the polls still show that a majority of the workforce would join a union if they could.

Mike Cappelli
Mike Cappelli
13 years ago

Bob Walsh,
I don’t see where you have figured in the health care component. Care to take a guess at how that throws the numbers off – and in whose favor???

Ragin' Rhode Islander
Ragin' Rhode Islander
13 years ago

>>At least it helps to remind folks why they need a union. No wonder the polls still show that a majority of the workforce would join a union if they could.
I’ll bet that thousands of auto workers and steel workers and garment workers who are now unemployed (thanks to union greed) would just love to “join” the union, i.e., get their jobs back!

Bill
Bill
13 years ago

Nice dodge Bob. Why don’t you respond to the real issue at hand, which is George Elbow’s clear and concise analysis that turns your argument on its head?
I assume you are scrambling to request a calculation of Plan C?
Admit it Bob, you don’t have a leg to stand on in this debate. The facts, the numbers don’t lie. The gauranteed pension benefits doled out to the public employee unions are destroying the economic viability of this state.
Mike – you are exactly right, but don’t confuse Bob. He can only spin one issue at a time.

John
John
13 years ago

George’s analysis was good as far as it went. However, it does leave out the fact that the state/employer’s contributions have been lower than what they (in the actuarial sense) should have been in the past, which has contributed to the current underfunding of the future liability for pension payments (leaving post retirement healthcare benefits out of the discussion for now). Undoubtedly, Bob Walsh will bring this up, and suggest that fairness or equity or something along those lines demands that we (the state/taxpayers) issue pension bonds or sell the Pell Bridge and other assets in order to make up this deficit. However, this ignores the fact that said underfunding was a political decision made by the people’s representatives in the General Assembly (who used the money to fund growing welfare programs which forged an alliance between the union and progressive wings of the Democratic Party as private sector union membership declined, and in so doing maintained the Democrats unbroken control of Smith Hill). Like it or not, Bob’s fellow Democrats made the decision to underfund. And now Bob’s fellow Democrats face another choice: do they cut pension benefits to reduce the future liability to a level commensurate with current pension assets and expected future contributions and earnings (note: that constant 7% assumption creates too rosy a picture; the right way to do the analysis is with stochastic annual returns and plan participant longevity)? Do they sell assets and issue pension bonds? Or do they pass a huge increase in RI’s already very high taxes (income, sales, corporate or some combination thereof)? Just as the U.S. Congress reduced the size of the future Social Security liability by raising the retirement age, so too can the RI General Assembly legislate its way out of this mess. Bob may not like it,… Read more »

Larry
Larry
13 years ago

Bob Walsh – go read George Elbow’s post from 9:15 pm and then tell us your union’s are not sticking it to the taxpayers with their entitlement-minded unsustainable benefit plans. And as Mike said, he didn’t even factor in the healthcare plans.
Just what part of Elbow’s analysis did you not understand? How can you possible take issue with your own facts?

George Elbow
George Elbow
13 years ago

John – with respect, it is irrellevent whether or not the state/taxpayers withheld employer contributions from the pension system.
Certainly, that will be Bob Walsh’s weak argument.
But the issue at hand, which I tried to demonstrate to Bob Walsh using his own figures, is that the benefits paid to his union flock are simply unsustainable. The math just does not work, regardless of whether or not the taxpayers funded every year.
And, as you correctly noted, imagine if the taxpayers had funded every year. They are already taxed to the hilt. Funding these nutty benefits just would have added to their burden.
The only discussion that should on the table at this point is “do we move to a 401k style defined contribution plan as of December 2008 or do we wait until July 2009”.
The debate of whether or not the existing plan is fair, sustainable or acceptable is over. Bob Walsh and his flock lost that argument before it even started.
Bob just needs to accept reality and be thankful that the gravy train lasted as long as it did.

michael
michael
13 years ago

After reading this drivel I get the feeling I’m fighting one legged men in an ass kicking contest.

Bob Walsh
Bob Walsh
13 years ago

Michael,
I know – definitely a battle of wits with unarmed opponents – fortunately, I entered the true figures into testimony before the pension study commission months ago – Andrew template is fine, he just needs to use the real numbers as I noted above. As much as some of these folks, who clearly have a different agenda, whine, complain and just outright ignore the facts, the truth will prevail. But, as the man said, they just can’t handle the truth.
Sometimes I do wonder how some of these people make a living, or if there is any real world experience behind some of these anonymous posts at all.

Steve
Steve
13 years ago

Michael – I agree. Listening to Bob Walsh’s unsubstantiated spinning is painful. BTW, becareful, as you don’t put your full name and Bob does not like “anonymous posts”.
Bob Walsh – Please do us a favor and put the numbers in. Let’s, as you suggested and George Elbow did, just look at (1) what does the employee contribute ($389k), (2) how much do those contributions earn ($1,365k), assuming they earn 7% EVERY year, and (3) what is the total benefit paid to the employee ($4,130k).
The difference is what the taxpayer has to make up, which is comprised of the dollars taken out of the taxpayer’s pocket to fund the pension as well as the lost earnings that the taxpayer would have earned on those taxes paid.
Do the math, Bob, and then tell us what you think. You can save yourself time by just looking at George Elbow’s numbers, which are correct.
Indeed, the benefits paid to the employee ($4.13 million) far exceed the contributions made by the emloyee plus earnings ($1.755 million), the difference having to be made up by the Taxpayer. It’s that simple, is it not, Bob?
Please, Bob, tell us what we are missing here. Can you not handle the truth?
Once you understand the numbers, Bob, then we can move to the discussion about why the Unions should received Guaranteed benefits via defined benefit plans when, in fact, there are NO guarantees in the economy and no gaurantees on the performance of the Pension fund that is so critical to your “justification”.
But first, at least acknowledge that the numbers don’t lie and that the employees are getting a massive (and unsustainable) benefit as compared to what they contribute.
We look forward to your spin, Bob.

Milton
Milton
13 years ago

Mr. Walsh, I’ve read all the posts on this subject (including the one’s under Justin’s original post), as well as Ms. Hanson’s and Mr. Cournoyer’s letters that started all this. So far, you have posted on several occasions things like “the facts and math are wrong”, yet you never articulate or explain what is wrong. I suspect that your vagueness is due to the fact that you privately agree with Mr. Cournoyer’s original assertion that the benefits paid are far in excess of any contributions made by the employees and are mathematically unsustainable. I’ve reviewed the calculations presented. Unfortunately, Mr. Elbow’s, as well as Mr. Cournoyer’s, are right and you are wrong, Mr. Walsh. The question at hand is what is the employee receiving in pension payments in relation to what they pay in, the difference being the cost to the taxpayer. This question is important, because many public employees are under the false belief that their contributions fund the majority of their pension. In both cases (Mr. Cournoyer’s and Mr. Elbow’s), the answer is clear. The cost and burden of providing these benefits overwhelmingly fall on the backs of the taxpayers. In Mr. Cournoyer’s analysis, he appropriately does not include “earnings” as the employee has no risk relative to those earnings. They get paid the $1,230,000 in payments in his example regardless of whether or not the employee’s $75,000 in contributions accrue earnings or losses. In Mr. Elbow’s analysis using your parameters, the employee gets the benefit of $1.3 million of earnings that may or may not materialize. The only thing that is gauranteed in Mr. Elbow’s analysis is the $4.1 million of pension payments to be made to the employee. In both cases, it is clearly demonstrated that the employee is receiving a significant benefit as compared to… Read more »

Andrew
13 years ago

I’ll try to run the numbers on a few other options (Plan B, salary increases due to a step schedule tonight, etc.) and present the results. Bob, one thing that jumps out me from the looking at the table in the main post plus reading about the reforms you’ve described is that delaying the COLA increases for 3 years makes solid fiscal sense – it extends the growth of an individual’s contribution to the fund in the biggest growth years by just a little more, right? Michael is not anonymous. He’s just got enough of a celebrity to get by on first name alone! George Elbow/Bill/Larry/Tired of Bob/Milton, on the other hand, you have either enough multiple anon identities or enough people logging in from the same computer to form a pretty good sized union of your own. Question for the George Elbow/Bill/Larry/Tired of Bob/Milton gang (of one), if you’re such a mathematical genius, how come you don’t realize that you are sinking the argument that 401(k)s are a valid retirement option faster than you are discrediting defined benefit pension plans? If the figures from the kind of analysis in the main post can’t produce a decent pension income, and if “employee receipts” greater than “employee contributions” is deemed unacceptable, then there is no way that a 401(k) can produce an acceptable retirement income stream either. The arguments against defined benefit plans aren’t based on the fact that it’s impossible for them to make fiscal sense. It’s that a) they are too susceptible to being raided in various ways (especially in the case of public pensions, where politicians have the power to change the plan midstream) and — more importantly I would say — b) that people who aren’t driven enough/lucky enough to find the single job by age 30… Read more »

Bob Walsh
Bob Walsh
13 years ago

You can all use an many words as you need to try to obscure the truth, or try to slant the discussion away from the facts that prove you wrong, but the truth remains the truth.
Let’s review the facts once again.
Plan B – Teachers
Contribute 9.5% of salary (among the highest in the country)
Management – contributes enough to cover active cost (about 3 – 4% of salary) plus a lot more (about 20% of salary) to pay unfunded liability. When the unfunded liability is paid off, only the 3 -4% management contribution need be made to sustain the system forever. It the system went away, still have to pay off unfunded liability, and the costs go through the roof)
Pensions system invests all funds with targeted 8.25% average annual return, have always exceeded that average. So 8.25% is the actual RI number (continued excess returns mean the unfunded liability gets paid down faster).
If a teacher starts working at age 22, works until age 60 (38 years) to get maximum 75% benefit, COLA at CPI with 3% cap kicks in at age 63 (Social Security COLA is CPI without a cap).
DO YOUR OWN MATH (or maybe Andrew will do it for you, if you ask him nicely). Teacher 9.5% contribution plus minimal management contribution (use 4% if you want to run your own numbers) is more than enough to pay for pension, plus COLA, for expected life.
Here ends the pension tutorial – unfortunately, I suspect many of you will have to attend pension summer school as your political agendas have distracted you from learning.

Tom W
Tom W
13 years ago

The devil is in the details with Mr. Walsh, I’m afraid. What we appear to have here is a cherry-picking of facts to reach a desired outcome. Mr. Walsh keeps referring to “Plan B” persons. Even if we assume for the sake of argument that his numbers / calculations are correct as to those … Plan B people appear to be what the State retirement system refers to as “Schedule B” participants. Those are people hired AFTER 1995, with whom the General Assembly made some (pretty benign) reductions in the pension benefit a few years ago. But Mr. Walsh is ignoring “Schedule A” employees – EVERYONE hired before 1995, and presumably a major portion (probably the majority) of the state employee / teacher workforce. So far their extravagant pension benefits haven’t been touched at all. [Just copied this from the state retirement web site: “If you are a state employee or public school teacher, you can retire with 28 years of service or at age 60 with 10 years of contributing service if you are in Schedule A (vested as of 7/1/05). Schedule B members (vested after 7/1/05) may retire at age 65 with 10 years of service, or at age 59 with 29 years of service.”] Note that the Schedule A folks still have no minimum retirement age – just “28 years of service” which is damn sweet when one starts in their twenties! And ignoring the Schedule A impact on the state pension system is disingenuous (to put it mildly). Further, the pension system today has as assets the money that the state has put in (the Democrats running the General Assembly HAVE underfunded, for political reasons as a preceding poster so eloquently described – but this is not to say that the taxpayers still haven’t “invested” millions… Read more »

John
John
13 years ago

Bob W writes: “Management – contributes enough to cover active cost (about 3 – 4% of salary) plus a lot more (about 20% of salary) to pay unfunded liability. When the unfunded liability is paid off, only the 3 -4% management contribution need be made to sustain the system forever. It the system went away, still have to pay off unfunded liability, and the costs go through the roof) Pensions system invests all funds with targeted 8.25% average annual return, have always exceeded that average. So 8.25% is the actual RI number (continued excess returns mean the unfunded liability gets paid down faster).” Not exactly. As TomW notes, management/taxpayers have made contributions over the years to the defined benefit plan, to the extent voted on by the General Assembly, which was controlled by the Democratic Party. That we are today facing a whopping unfunded liability (one of the worst in the nation on a percentage basis) reflects four factors: (a) the size of the benefit package; (b) increases in average longevity; (c) the structure of investment returns (hint: it’s not the average that counts), and (d) the level of plan funding (which in this case refers to the amount contributed by management/employer/taxpayers). As an aside, few if any private sector DB plans use the 8.25% average return assumption today; it is just too aggressive and serves no purpose other than to hide the true size of the unfunded liability (states have the luxury of not being subject to ERISA, which regulates private plans). So, given that we can’t do anything about increasing longevity or about investment returns, we’re left with a choice of reducing benefits or taking a major piece of change out of taxpayers’ pockets, in one way or another (e.g., a tax hike, asset sales, pension bonds, etc.).… Read more »

Tom W
Tom W
13 years ago

>> Bob W writes: “Management – contributes enough to cover active cost (about 3 – 4% of salary) plus a lot more (about 20% of salary) to pay unfunded liability. When the unfunded liability is paid off, only the 3 -4% management contribution need be made to sustain the system forever. It the system went away, still have to pay off unfunded liability, and the costs go through the roof)
Note too that the unfunded liability is the reciprocal of projected payouts. If we reduce the benefit formula (e.g., freeze the pension system so there are no additional accruals) then the projected payouts go down, and so to does the unfunded liability.
As I recall Ocean State Republican ran a series that went into some detail about this (scroll down):
http://oceanstaterepublican.com/category/rhode-island-red/
Mr. Walsh appears to be presupposing that existing benefit formulas remain intact (surprise, surprise).
There’s no reason why prospectively (prospectively as to time, not as to limiting changes only to future hires and exempting current participants) benefit formulas and contribution amounts for current and future employees could not be reconfigured to eliminate the unfunded liability with no taxpayer contribution required.

michael
michael
13 years ago

“George Elbow/Bill/Larry/Tired of Bob/Milton,”
Apparently I was in an ass kicking contest with a one legged man with multipe personalities. Who would have guessed!
I am no mathemetitian, that much is certain but I know enough to know that any retirement/pension that is part of an employee package will cost that employer something, whether it is publicly or privately funded. I get a headace reading all of the different ways Andrew’s numbers get twisted.
Tom W, one of the commenters here whose opinions I value is closest to getting the mess figured out but still is missing an important point, the pension is part of a benefit package. The benefit package was offered to me when I accepted employment with the City of Providence. I didn’t demand it or crunch the numbers or do an audit, I trusted the integrity of the people who hired me to have figured this thing out before offering the package. I’ve planned my future based on the numbers supplied to me and doing some investing and career building on my own. The only demanding I’m hearing is people who’s future’s are not tied to the pension systems demanding I sacrifice my future so they can save a few bucks on their tax bills.

John
John
13 years ago

Andrew, To clarify one point, George’s arguments are not, per se, an argument against defined contribution pension plans and in favor of defined benefit plans. The key is to distinguish between the accumulation and decumulation stages of an investor’s life. DB plans have some alleged advantages, including professional investment management and a built-in annuitization process during the decumulation stage, which theoretically eliminates the risk of an retiree outliving his or her assets. In practice, however, these benefits prove to be more apparent than real. Too many “professionally” managed funds are invested in actively managed products that underperform much cheaper index funds that investors could access themselves (e.g., the federal government’s version of a 401k — the TIP Plan — only offers low cost index type funds as investment options). Moreover, as I have noted before, the “you won’t outlive your retirement assets” promise also has important hidden caveats: provided the firm offering the plan doesn’t go bankrupt before said plan is fully funded, provided the actuarial assumptions guiding that funding are accurate, provided you don’t leave the company before your benefits vest, and provided the company doesn’t decide the plans’s cost (e.g., additional contributions required when average longevity increases or to cover investment losses) become too expensive and the plan is terminated. A good comparison is to Superannuation Plans in Australia. These are essentially 401k plans that are mandatory for all employees. While unlike the federal plan, the default investment options are broader than index funds, they are still quite tightly regulated to limit the ability of an uninformed investor to hurt their retirement income prospects. Finally, upon retirement, there is a mandatory conversion into a life annuity. Given the size of the pool (in which some will die sooner than average and some will die later), and the funded… Read more »

George Elbow
George Elbow
13 years ago

Andrew, Ok, let’s try one more time. I’ve given up on Mr. Walsh providing answers, as all he does is repeat “facts” without applying them to the Pension formula to produce an honest answer. The exercise we have been debating has the following simple objectives: 1- Demonstrate to the Public Employees who are under the false belief that the majority of their Pension benefit is somehow covered by their contributions and related earnings. Remember, this all started when P.E. Hanson implied that only 25% of her Pension was funded by the taxpayers. This is a common myth amongst the uninformed, including Michael, who has acknowledged he did not understand how the math worked …no crime there, but be willing to be educated. 2- Demonstrate that given the overly generous nature of the benefits provided, the cost to the taxpayer is unrealisticaly and unsustainably high. The overly generous nature of the benefits manifest themselves as follows: (a) the early age at which the employee can go on pension …e.g. 59 in some cases, but we all know we have MANY people going on Pension in their 40s and 50s. In fact, Ms. Hanson said she could begin collecting a 40% to 50% Pension after just 20 years (b) the extremely high rate at which they collect [e.g. 60%, 75%, 80%] (c) the automatic “cost of living adjustment”. With that in mind, it would be helpful if Andrew would adjust his calculation spreadsheet to reflect the following discreet items: 1) Employee contribution at 9.5%, with a total 2) Earnings on the employee contributions at 7%, with a total 3) Taxpayer contributions at 5% as Mr. Walsh suggested, with a total. 4) Earnings on Taxpayer contributions, at 7% with a total. 5) Pension Payments to employee thru age 83. From this, it will… Read more »

Tom W
Tom W
12 years ago

>>Tom W, one of the commenters here whose opinions I value is closest to getting the mess figured out but still is missing an important point, the pension is part of a benefit package. The benefit package was offered to me when I accepted employment with the City of Providence. I didn’t demand it or crunch the numbers or do an audit, I trusted the integrity of the people who hired me to have figured this thing out before offering the package. I’ve planned my future based on the numbers supplied to me and doing some investing and career building on my own. The only demanding I’m hearing is people who’s future’s are not tied to the pension systems demanding I sacrifice my future so they can save a few bucks on their tax bills. Michael, First, thanks for the kind words. While I can understand your desire to keep the package that was in place on the day you first accepted employment, and perhaps there is some moral basis for arguing that it shouldn’t be changed midstream. But alas that is not the world we live in. For example, if your pay rate never changed since the day you first accepted employment, the argument against changing the pension formula would be much stronger. But of course you’ve had raises over the years. If change can go in one direction at some times (increasing your compensation), then why can’t it go the other direction at other times? Also, the very concept that benefits in place on the day that an individual is hired can’t be for the duration of their employment, even if it lasts 30 or more years, is ridiculous when one thinks about it. Even in unionized environments (at least in the private sector, coming soon to the… Read more »

Tom W
Tom W
12 years ago

As a postscript Michael, if you have a beef, it is with your union leadership / the leadership of the state AFL-CIO.
They live up at the Statehouse, and exert great influence over the leadership of the General Assembly, if not control it.
So why did that union leadership sign off, year after year after year, on budgets that underfunded the state pension system?
Why did they act against the best interests of the rank and file?
Why did they not demand that the tobacco money windfall be injected into the pension fund to eliminate the unfunded liability?
They have access to all the annual reports and financial statements – why did they stand by and let the unfunded liability balloon until it hit FIVE BILLION DOLLARS?
What incentives / reward did they get for looking the other way while the rank and file was being sold down the river????
A lot of union officials serve in the General Assembly, and have for years (if not decades). Why were they not sounding the alarm on behalf of the rank and file whom they are supposed to represent and protect???

George Elbow
George Elbow
12 years ago

Tom W –
Excellent commentary.
I fear you will not get throught to Michael and his union brethren, as you are trying to apply logic and common sense to a problem [for example; you make an excellent point that Michael does not complain that his salary today is NOT the same as what is was on his first day of work.] Unfortunately, an entitlement mentality is not bourne of logic and common sense. So I am not confident that you will get thru to Michael & Co.
With respect to the General Assembly “not funding the pension plan”, the reason is that even they knew the taxpayers couldn’t afford to fund the lavish and unsustainable benefits bestowed to the Michaels of the world.
The issue isn’t whether the General Assembly funded the Pension (i.e. raised our already astronomical tax rates), but rather what is fair and affordable. And the answer, despite Michael’s and Bob Walsh’s refusal to acknowledge basic math, is that the current system is unfair and unaffordable …unless you are a Union beneficiary living in a fantasy world blinded by entitlements.

Bob Walsh
Bob Walsh
12 years ago

George Elbow,
Your basic grasp of these concepts continues to be severely lacking. Please provide your credentials as an expert on this subject, your backup reseach, or any other materials you have used to come to your conclusions.

Tom W
Tom W
12 years ago

>>George Elbow, Your basic grasp of these concepts continues to be severely lacking. Please provide your credentials as an expert on this subject, your backup reseach, or any other materials you have used to come to your conclusions.
Et tu, Mr. Walsh? Posting on the NEARI web site would be a convenient avenue of distribution.

Tom Wt
Tom Wt
12 years ago

>> Tom W – Excellent commentary. Thank you. I do have to get better about checking for typos and grammatical errors before I hit “send” – I tend to bang these postings out and miss those when just reading online than with printing out a hard copy to edit first. >>I fear you will not get throught to Michael and his union brethren, as you are trying to apply logic and common sense to a problem [for example; you make an excellent point that Michael does not complain that his salary today is NOT the same as what is was on his first day of work.] Unfortunately, an entitlement mentality is not bourne of logic and common sense. So I am not confident that you will get thru to Michael & Co. Michael strikes me as quite intelligent and articulate, and fairly reasonable. I do think that he’s swallowed a bit too much of the union Kool-Aid, but reasonable people can disagree about that. As for his “union brothers and sisters” nobody wants to go backwards. That doesn’t make them bad people, just normal and economically rational. The problem is (and has been) the system – the political process has been perverted to suit the ends of public sector unions. >>With respect to the General Assembly “not funding the pension plan”, the reason is that even they knew the taxpayers couldn’t afford to fund the lavish and unsustainable benefits bestowed to the Michaels of the world. The caliber of people that inhabit the Democrat General Assembly, and their record, speak for themselves. Short term political reward (public sector union support and money) while putting off the bills for future years … that and an emphasis on expanding the welfare system by the “progressive” wing of the Democrat Party explains the… Read more »

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