IN THIS ISSUE
But the Pension Fund was Just Sitting There...
The Florida State Legislature is after our retirement benefits again. The Leadership is pushing legislation to convert the system into a defined contribution plan - and not necessarily the defined contribution plan many of us are currently on. We take a closer look at this situation.
The Florida Education Association will be joining with other unions in Tallahassee during this legislative session.
Meanwhile, the St. Petersburg Times has put up a page tracking the legislative session.
- Defined Benefit versus Defined Contribution. A defined benefit plan places the risk on the retirement system, while a defined contribution plan places the risk on the retiree - risks that participants often fail to address. For more, see below.
- And This Reform is Necessary Because ...? Just as in 2011, proposals to "reform" the pension plan are accompanied by warnings that the current system is unsound. The very fact that this argument is being advanced, again, suggests another agenda. For more, see below.
Defined Benefit versus Defined Contribution
Pensions in the United States appear to have started in the military, which today has a traditional defined benefit plan: benefits depend on years of service, pay grades, and so on. The formula for computing those benefits might be a bit complicated, but the results are unequivocal in two important ways: the benefits are defined in advance so that military personnel know what they are, and the U. S. government has assumed the responsibility of providing those benefits as stated.
Over the history of the Republic, both retirement and the pensions that made retirement possible have grown: in 1880, five years after American Express launched one of the first private pension plans in the U.S., EH.net estimates that 78 % of all men 65 and older were in the work force; as of 2000, it was 17.5 %. As unions proliferated and grew more powerful, pension plans grew with them, and during 1947 - 48, pensions came under the jurisdiction of labor law. According to the Employee Benefit Research Institute, the percentage of private sector employees covered by pension plans increased from 25 % in 1960 to 41 % in 1960 to 46 % in 1980.
These were largely defined benefits plans. According to the U. S. Social Security Administration, as of 1980 four fifths of the employees with pensions - 38 % of all U. S. employees altogether - had defined benefits plans. A quarter century later, only one fifth of all U. S. employees had defined benefits plans.
The defined benefits plans were replaced by defined contributions plans, in which participants (and perhaps their employers) paid to a fund, and upon retirement, the resulting lump sum was what the retiree got.
As unions declined, corporations found it easier to weasel out of contractual obligations for retirement benefits, and these became increasingly defined contributions plans.
- On the one hand, for those participants who wanted to try for greater investment growth, or who wanted to be able to change jobs to an employer with a different plan, a defined contributions plan provided those options.
- On the other, it shifted the risk from the pension manager to the participant - who often has neither the expertise nor the time to optimize the investment.
Unions are suspicious of anything that sounds too good to be true, and they tend to like their benefits defined. But as unions declined, defined benefits plans declined with them (while the percentage of employees with any plan stagnated). And the result is...?
Many people, perhaps most, approach retirement the same way they approach wills and funeral preparations, i.e., with less resolution than facing the dentist or the bathroom scale. The workforce is full of employees who will think about that tomorrow. HR departments - including USF's - moan about employees who avoid the subject until shortly before retirement and then, surprise, surprise. Defined benefits plans had the advantage that you knew roughly what you got. Defined contributions plans are surrounded by formulas and probabilities of the sort that made financial phobias a serious topic among investment counselors.
The result is that employees are not preparing for their retirement adequately. For example, according to Shlomo Benartzi and Richard Thaler, defined contributions plans "provide economists with an attractive domain in which to study savings behavior." They conclude that investors "are slow to join advantageous plans; they make infrequent changes; and they adopt naïve diversification strategies." Always optimistic about getting people to invest wisely, they propose design changes in defined contributions plans to improve participants' prospects. But they point to John Skinner's study on how people are actually doing now, and Skinner concludes that Baby Boomers are not saving enough.
Since the FEA works for real people - you and me - and not the imaginary investment-optimizing beings of the world defined contributions plans are supposed to serve, the FEA defends the current defined benefits plan, with defined contributions alternatives for those who want it.
And This Reform is Necessary Because ...?
In 2011, Governor Scott launched a proposal to "reform" the Florida Retirement System because it faced insolvency. He quickly acquired a chorus of legislative leaders, but the experts disagreed, claiming that the FRS was fine if only the legislature didn't sabotage it. Thus began a sequence of rationales for his reforms. Nevertheless, after a major battle with the unions, he did get the legislature to tax public employees 3 % of their salaries so that the legislature could cut its payments to the retirement fund (he had originally wanted 8 %).
This January, House Speaker Will Weatherford started his campaign to "reform" the FRS using the same rationale: he called the FRS a ticking time bomb, and his proposed cure was to do away with the defined benefits plan. Senator Jack Latvala soon complained that any problem the FRS had was because the legislators "haven't been funding the contributions that we’re supposed to make". (Latvala's complaint was implicitly acknowledged by Governor Scott's recent proposal to fully fund the program.)
But if 2011 has shown us anything, it is that logic doesn't matter. What matters is legislative votes. So the FEA and fellow unions will be walking the halls this coming session, reminding legislators of the economic effects of torpedoing the FRS - and by their presence reminding legislators that union members vote.