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Cypen & Cypen
OCTOBER 6, 2011

Stephen H. Cypen, Esq., Editor

1.      COMPARING WEALTH OF STATE-LOCAL VERSUS PRIVATE SECTOR RETIREES: A new Issue in Brief from Center for Retirement Research at Boston College deals with compensation of public employees, a hot topic in the wake of the financial crisis. Funded levels of public pension plans declined sharply at the same time that state and local revenues collapsed.  As a result, plan sponsors in most states are looking for ways to reduce pension costs. The assumption -- either explicit or implied -- is that pensions are too generous.  Pensions, of course, are just one part of compensation, so any comparison must also consider wages and other benefits.  The question of comparability of compensation in the state-local and private sectors was the focus of a recent Issue Brief (see C&C Newsletter for September 22, 2011, Item 2).  The conclusion was that wages for workers with similar characteristics, education and experience were higher in the private sector than the public, but benefits for state-local workers roughly offset the wage penalty. Taken as a whole, compensation in the two sectors is roughly comparable. The brief takes a somewhat different approach to the question of compensation using household data. It asks whether, at the end of the day, state-local employees end up with more wealth at retirement than their private sector counterparts.  That is, it looks at the wealth of couples where the head is age 65, and tests, controlling for many other factors that could affect the outcome, whether state-local employment has a positive or negative effect on wealth, and how that effect is related to tenure in the state-local sector.  Discussion proceeds as follows.  The first section presents data and methodology to estimate the impact of state-local employment on wealth at age 65.  The second section presents the results.  They show that those with state-local employment who spent more than half their career as a public worker, about one-third of the total group, had 11 percent to 18 percent more wealth at age 65 than similar private sector couples. The other two-thirds of those with state-local employment who spent less than half their career as a public worker ended up with less wealth than private sector employees.  The third section discusses issues related to the analysis -- the possibility that state-local workers retire early, the role of defined benefit plans and recent developments that might limit applicability of the results to today’s environment.  The final section concludes that, despite some limitations, the results show that, as a group, couples with state-local workers, all else equal, do not end up richer than couples with private sector careers. How many more studies will it take like this one to get that point across? SLP #21 (0ctober 2011). 

2.      NEW STUDY FINDS DB PENSIONS STRONGLY PREFERRED OVER DC:  Defined benefit pension plans are designed to provide employees with a predictable monthly benefit for life. The amount of the monthly pension is typically a function of the number of years an employee devotes to the job and the worker’s pay, usually at the end of his career.  The plan design is attractive to employees because of the security it provides.  Employees know they will have a steady, predictable income that will enable them to maintain a stable portion of their pre-retirement income. DB plans are pre-funded retirement systems.  In other words, employers -- and in the public sector, employees -- make contributions to a common pension fund over the course of each employee’s career.  These funds are invested by professional asset managers whose activities are overseen by trustees and other fiduciaries.  The earnings that build up in the fund, along with the dollars contributed while working, pay for the lifetime benefits an employee receives when he retires. Defined contribution accounts, such as 401(k) plans, function very differently than DB plans.  First, there is no implicit or explicit guarantee of retirement income in a DC plan.  Rather, employees (and usually employers) contribute to the plan over the course of a worker’s career.  Whether the funds in the account will ultimately be sufficient to meet retirement income needs will depend on a number of factors, such as the level of employer/employee contributions to the plan, investment returns earned on assets, whether loans are taken or funds are withdrawn prior to retirement and the number of years retirees will live after they leave work. DC plans consist of separate, individual accounts for each participant. Plan assets are typically “participant directed,” meaning that each individual employee can decide how much to save, how to invest the funds in the account, how to modify these investments over time and, at retirement, how to withdraw the funds. Along with differences in contributions and investments during employees’ careers, another important difference between DC and DB plans becomes apparent at retirement. Unlike DB plans, where retirees are entitled to receive regular, monthly pension payments for life, in DC plans it is typically left to the retiree to decide how to spend his retirement savings.  Research suggests that many individuals struggle with this task. Since they find it difficult to estimate how long they will live, they either draw down funds too quickly and run out of money, or hold onto funds too tightly and self-impose a lower standard of living as a result. In theory, employers that offer DC plans could provide annuity payment options, but in practice they rarely do. National Institute on Retirement Security has released a study entitled “Decisions, Decisions:  Retirement Plan Choices for Public Employees and Employers.” The study analyzes seven state retirement systems (including FloridaRetirement System) that offer a choice between DB and DC plans, to find that the DB update rate ranges from 98% to 75%. The percentage of new employees choosing DC plans ranges from 2% to 25%. Other key findings are 

  • DC plans are less cost efficient than DB plans, due to lower investment returns, and the lack of longevity risk pooling. 
  • Some states have considered moving from a DB-only to a DC-only structure in an attempt to address an unfunded liability. Making this shift, however, does nothing to close any funding shortfalls, and can actually increase retirement costs. 
  • DC accounts lack supplemental benefits such as death and disability protection.  

That public employees highly value their DB pension benefits, coupled with the fact that DB pensions remain the most cost-effective way to fund a retirement benefit, suggests that the public sector is unlikely to mimic the trend away from DB pensions in the private sector. Amen. 

3.      CHANGING LANDSCAPE OF EMPLOYMENT-BASED RETIREMENT BENEFITS:  United States Department of Labor, Bureau of Labor Statistics, recognizes that as types of retirement benefits provided by employers have changed, so have plan features. Retirement income comes from many sources, but except for the independently wealthy and those with large inheritances, various sources of retirement income for most Americans have come from relationship to their work.  Social Security is funded by employer and employee payroll taxes.  Employment-based retirement benefits, including defined benefit and defined contribution plans, are part of the compensation package of many workers.  Personal savings can be built up over a lifetime, but often include Individual Retirement Accounts, which are only available to those who have earnings from work (and nonworking spouses).  Further, earnings from current employment have become an increasingly common source of income for older Americans in recent years. And lest we forget: 

Supplemental defined contribution plans were introduced during the 1980s as a way for employers to provide an additional benefit to employees and often as a means of getting employees to invest in employer stock.  Over time, these supplemental plans (or some subsequent version of them) somehow became the primary (or only) retirement plan. 

Somebody was asleep at the switch. 

4.      NEW YORK STATE TRUSTEE WANTS TO PROTECT DB PLANS: Thomas P. DiNapoli, comptroller of the state of New York and sole trustee of the $147 Billion New York State Common Retirement Fund, has suggested creating a national commission to examine ways to maintain existing defined benefit plans. According to, the commission also would seek creative solutions to address the retirement security challenge facing those with inadequate retirement resources. Among the questions such a commission should examine are 

  • Should we encourage consortiums of smaller pension plans with the goal of achieving economies of larger-scale pension plans?  
  • Should federal law be amended so that public plans would be allowed to be open to private individuals and employers?  (See C&C Newsletter for September 29, 2011, Item 4.) 
  • Should Social Security withholding be used to boost savings for Americans through voluntary individual accounts in addition to the existing benefit?  

Maintaining strong defined benefit pensions is not only the right thing to do for our citizens, it is the best thing for our nation’s economy now and into the future. Defined benefit retirement systems are affordable and sustainable for the long term. According to the Center for Retirement Research at Boston College, pension contributions from state and local employers amount to just 3.8% of state spending, on average (see C&C Newsletter for September 22, 2011, Item 2). And, according to National Association of State Retirement Administrators, the number is an even lower 2.9% (see C&C Newsletter for March 10, 2011, Item 3). (In New York, the number is 2.4% of state operating funds.) It is important to note that over the past 20 years, 83 cents of every dollar in benefits paid to New York retirees has come from investment returns, not employee or employer contributions.  (The national average is 68% for state plans.) Moving to defined contribution arrangements or 401(k)s is a bad idea. They were never intended to take the place of pensions. They were designed to be savings vehicles to supplement pensions and Social Security income (see item 3 above).  Overall, they have proved to be woefully inadequate for those who rely on them for their primary retirement income.   During the recent Great Recession, 401(k) plans lost a collective $1 Trillion. In addition, studies have shown that defined benefit plans cost 46% less than individual 401(k)-style savings accounts. 

5.      HOW HAVE PUBLIC SECTOR PENSIONS RESPONDED TO FINANCIAL CRISIS?:  That question is the subject of a new Working Paper from Pension Research Council, The Wharton School, University of Pennsylvania. Roughly four out of five employees of state and local governments in the United States are covered by a defined benefit pension plan, versus only around one in five private sector workers.  Prior to the financial market disruptions of recent years, public sector pensions were well funded, at least according to their own accounting conventions.  As of 2007, the average public pension plan was 84.6 percent funded.  In 2009, by contrast, the average public pension plan was only 77.1 percent funded. This decline in pension health was largely due to a precipitous decline in pension assets.  These plans had increasingly invested in equities, rising from roughly one-third of pension portfolios prior to the mid-1980s, to around two-thirds of assets prior to the financial crisis.  While higher expected returns on equities allowed states to reduce pension funding from around 6 percent of state budgets through the mid-1980s to around 3 percent prior to the crisis, the downside is higher sensitivity to annual market returns.  Since public pension plans generally assume an 8 percent return on assets, this figure implies that, even today, plan assets are more than 25 percent below levels projected as of 2007.  Indeed, even if public plans returned 11.5 percent annually going forward, it would take them eight years to catch up to asset levels projected prior to the financial crisis.  So, how have public sector pensions have reacted to such changes?  As a matter of law and general plan stewardship, many plans have increased contributions for employers, employees or both, helping assets catch up more quickly with projected liabilities.  Such changes have been the subject of political debate in many states and localities.  A number of states have attempted to reduce the generosity of benefits, principally for newly-hired employees, but, in some cases, for current employees, which is often legally problematic and potentially resolvable only in court. However, the paper focuses on investment practices to ask whether public pensions altered their investment plans since the financial crisis, and if so, how?  One hypothesis is that public pensions, with their focus on longer time horizons, would make few changes to their investment practices in response to the large market shifts.  Alternately, either increased or decreased risk-taking is also plausible.  Following the financial crisis and the increased attention to the differences in risk between public pension assets and liabilities, some plans might reduce the risk profile of their pension investments.  Yet, other underfunded pensions might seek to recoup their losses by taking even more investment risk.  This action could be portrayed as an irrational reaction, similar to a gambler “doubling down” on risk, to make up for prior losses. Different plans in different circumstances could react in different ways. To assess the direction of such possible changes, the author first analyzed how public pension actual asset allocations changed between 2007 and 2009.  These changes were due both to choices made by plan managers, and, more importantly, relative increases and decreases in the values of various asset classes.  Second, the author analyzed changes to plan target asset allocations from 2007 to 2010.  Third, the author estimated the risk of target portfolios in 2007 and 2010 to analyze how plans’ desired mix of investment risk and return may have changed in response to the financial crisis and other factors. Pretty heady stuff. PRC WP2011-18 (September 2011). 

6.      OKLAHOMA TEACHERS RETIREMENT SYSTEM ON TRACK FOR FULL FUNDING:   The retirement system for Oklahoma public school teachers, which a year ago was one of the most underfunded plans of its type in the nation, is expected to eliminate its unfunded liability in 22 years.  The turnaround is attributed to legislation approved this year that is intended to improve the financial shape of the Oklahoma Teachers Retirement System, as well as strong investment returns. The system’s unfunded liability has dropped from more than $10.4 Billion to $7.6 Billion. Its funding ratio is improved from 47.9 percent to 56.7 percent. The system has about 146,000 members, including 90,000 active teachers and about 49,000 retirees/beneficiaries.  The fund’s strengthened position means it is expected to reach 100 percent-funded status in 2033, when just a year ago, it was projected never to reach fully-funded status.  Good job. 

7.      NYC POLICE “WHITE SHIRTS” TAKE ON ENFORCEMENT ROLE: The New York City Police Department puts an endless list of tasks on the shoulders of its so-called white shirts, the commanders atop an army of lesser-ranking officers in dark blue.   But, according to the New YorkTimes, the portfolio of the white shirt has now unexpectedly grown to include the role of enforcer.  As the “Occupy Wall Street” protests, which began on September 17, lurch into their third week, it is often the white shirts who lay hands on protesters or initiate arrests.  Video recordings of clashes have shown white shirts -- lieutenants, captains or inspectors -- leading underlings into the fray.  White shirts led the face-off with protesters on the Brooklyn Bridge last weekend.  The episode provided no viral YouTube moments, as senior officers avoided confrontations with demonstrators.  Nevertheless, as hundreds of arrests were made, chants of “white shirts, white shirts” could be heard.  Even the chief of the department, Joseph J. Esposito, the highest-ranking officer, was mixing with marchers over the weekend, briefly holding two people by the arm and directing their arrests.  One commander who spent time at the protests said there were moments when commanders must act:  “Any lieutenant or above can say, ‘Officer, arrest those three right there,’ but in the meantime, if you are standing near someone who should be arrested, grab him.  You still have the same powers.” 

8.      CONNECTICUT STATE WORKERS RUSH TO RETIRE: The State of Connecticut is ahead of its projections on retirements, with 2,693 applications submitted by September 30, 2011 -- a figure that is double what happens in a typical year.  The New Haven Register reports that to avoid pension changes that went into effect on October 1, 2011, workers had until 5 p.m. Friday to submit retirement papers. The final figure is expected to increase as individual agencies calculate the numbers, before they are reported to the comptroller’s office. Retirements in recent years were: 1,212 in 2006; 1,614 in 2007; 1,473 in 2008; 4,749 in 2009; and 1,233 in 2010.  The high number in 2009 was due to an early retirement incentive package. 

9.      PUBLIC PENSIONS REBOUND IN SECOND QUARTER: Much has been made about condition of the country’s public pensions.  State and local pensions face a large unfunded liability, mainly due to investments that lost money when the economic turndown began in 2008. But, according to, new census data show value of assets held by the country’s largest retirement systems is at its highest level in three years. Nevertheless, plans still have not returned to their pre-recession peaks. Success of pensions is crucial for taxpayers: when a pension plan does not have the funds to pay retirees what they are owed, taxpayers make up the difference, and can expect to see tax hikes or cuts in other areas to fund the shortfall. The second quarter marked the fourth consecutive quarter that investments were up, and the seventh quarter of year-to-year growth.  Assets are now valued at $2.8 Trillion. Corporate stocks, representing about a third of pension investments, are valued at $892 Billion (up 19.5 percent on a year-to-year basis). Census data are based on assets of the 100 largest state and local public employee retirement systems, which compose 89.4 percent of that segment. And then there is the third quarter… .

10.    FLA. AG BLASTS PENSION FUND ON PUBLIC RECORDS: Florida Attorney General Pam Bondi sharply criticized the head of the FloridaRetirement System over his decision to ask for nearly $11,000 in order to turn over public records.   Bondi called the actions of Ash Williams, executive director of the State Board of Administration, which manages FRS, “indefensible.” Williams came under fire after he told State Senator Mike Fasano that it would cost $10,750 to review and release records from SBA regarding its decision to invest money in an investment firm that specialized in shaking up companies.  Fasano reacted by asking state Senate to subpoena the records instead of paying the bill.  For his part, Williams told Bondi it was a “good faith” attempt to figure how much it would cost to review more than 6,000 documents the senator is seeking.  Curiously, Fasano has acknowledged that he made the public records request on behalf of the St. Petersburg Times. What gives? 

11.    SELL ON ROSH HASHANAH, BUY ON YOM KIPPUR: Although we may be a little late on this one, thought it benefiting to put this adage to the test after receiving inspiration from an article about the roots of the saying. According to the article, origins of this practice seem to be the belief of Jewish investors that they should liquidate their portfolios during the holiday so that their attentions could be fully focused on their worship. Looking back from 1915 on, performance of the Dow Jones Industrial Average from the last close before Rosh Hashanah until the last close before Yom Kippur (nine days) was tested.  Then how the Dow did from Yom Kippur until the end of the Gregorian calendar year (December 31st) was examined.  As it turns out, the thing might actually work.  The Dow averaged -0.62% from Rosh Hashanah until Yom Kippur, while it gained 1.99% from Yom Kippur to the end of the year.  For those who want to check it out, Rosh Hashanah began at sundown on September 28 and Yom Kippur begins at sundown on October 7.  Does anyone have change of a shekel? 

12.    PARAPROSDOKIAN: (A paraprosdokian is a figure of speech in which the latter part of a sentence or phrase is surprising or unexpected in a way that causes the reader or listener to reframe or reinterpret the first part. It is frequently used for humorous or dramatic effect.):    Nostalgia isn't what it used to be. 

13.    QUOTE OF THE WEEK: “Integrity is not a 90% thing, not a 95% thing – either you have it or you don’t.”  Peter Scotese

14.    ON THIS DAY IN HISTORY: In 1882,first World Series game, Cincinnati (AA) beats Chicago (NL) 4-0. 

15.    KEEP THOSE CARDS AND LETTERS COMING: Several readers regularly supply us with suggestions or tips for newsletter items. Please feel free to send us or point us to matters you think would be of interest to our readers. Subject to editorial discretion, we may print them. Rest assured that we will not publish any names as referring sources.

16.    PLEASE SHARE OUR NEWSLETTER: Our newsletter readership is not limited to the number of people who choose to enter a free subscription. Many pension board administrators provide hard copies in their meeting agenda. Other administrators forward the newsletter electronically to trustees. In any event, please tell those you feel may be interested that they can subscribe to their own free copy of the newsletter at Thank you. 



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Items in this Newsletter may be excerpts or summaries of original or secondary source material, and may have been reorganized for clarity and brevity. This Newsletter is general in nature and is not intended to provide specific legal or other advice.

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