Pensions 101 Retirement Security - Retired Americans · 0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%...

Ilana Boivie‐IAMAW‐Pensions 101 & Retirement Security 1

Pensions 101 & Retirement Security

Ilana Boivie, IAMAW EconomistAlliance for Retired Americans

Pension SeminarNovember 19, 2019

The American Pension Crisis an Alliance for Retired Americans Seminar

November 19-20, 2019


Best Chance for a Secure Retirement: “3‐Legged Stool”• Social Security: Basic

universal benefit; keeps retirees out of poverty

• Pension: Provides monthly income to supplement Social Security

• Personal Savings: 401(k) & other savings for “extras” beyond monthly bills

2Prepared by: IAMAW Strategic Resources




Pension v. 401kCharacteristic Traditional Pension 401k or other SavingsHow is the value of the benefit set?

Fixed formula Depends on account balance at retirement

How is the benefit doled out?

Monthly income stream

Typically a lump sum

What is the benefit timeline?

Lifetime income Lump sums are spent down at retiree’s discretion

Are investmentspooled?

Pooled investments Usually individuallyinvested

Who makes investment decisions?

Professional asset management

Individuals choose from plan choices

Who bears the risk? Employer(s) / plan sponsor(s)

Employees

Is there a guarantee? Usually guaranteed No guarantee

Prepared by IAMAW Strategic Resources 3




There are many types of pensions….

Public Sector

Federal (FERS) State/ Local

Single Employer

Multiple Employers

Private Sector

Church Plans

ERISA Plans

Single Employer

Multi‐employer





…all with different rules

• Subject to ERISA?

• Who makes contributions?

• Benefit guarantees?

• Funding rules?

• Accounting standards?

• Social Security coverage?

• Rules about benefit cuts?





Public v Private Pensions: Key Differences

State and Local Plans ERISA Plans(Private Sector)

Federal(CSRS and FERS)

ERISA? No Yes No

Who makes contributions?

Employer and employees

Employer only (most cases)

Employer (CSRS) and employees (FERS)

Who guarantees benefits?

Government employers PBGC Federal government

What is guaranteed? Traditional benefit “Normal” retirement benefit, up to a cap

CSRS benefit and FERS “basic benefit”

Funding rules? GASB sets guidelines Set in Federal law (ERISA, PPA)

Contributions set by statute

Accounting standards? GASB FASB FASAB

Social Security coverage?

25‐30% are not covered Yes CSRS: No

FERS: Yes

Benefit cuts allowed? Often only for new hires

Future benefits only (except under MPRA ) By Federal statute

6Prepared by IAMAW Strategic Resources




ERISA Plans: Single versus Multiemployer

Single Employer MultiemployerAdministration Employer Third party administrator

Oversight Employer& Federal government

Joint union/management Board of Trustees

& Federal government

Benefit formula Typically percent of final average pay or flat dollar amount

Typically a set dollar amount per hour

PBGC premium rates (2019)

$80 per participant +$43 per $1,000 in underfunding (capped at $541 per participant)

$29 per participant

PBGC guarantee cap (2019)

$67,295 / year(age 65, single life)

*MPRA does not apply

$12,870 / year(30 years of service)

*can be reduced due to MPRAUnion? Union participation not required Union participation required





Challenge: Underfunding since the Financial Crisis


Source: The Center for State and Local Government Excellence

Funded Status of State and Local Plans, 2001‐2018




Challenge: Underfunding since the Financial Crisis


Source: Pension Benefit Guaranty Corporation

0.0%

20.0%

40.0%

60.0%

80.0%

100.0%

120.0%

140.0%

2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015

Funded Status of Private Sector Plans, 2001‐2015

Single Employer Multiemployer




Trend: Private Sector Moving to 401ks Only


26%16% 10%

62%

24%17%

12%

60%73%

0%

10%

20%

30%

40%

50%

60%

70%

80%

90%

100%

1983 1998 2016

Workers with Retirement Plan Coverage by Type of Plan1983, 1998, and 2016

Both Defined Benefit Only Defined Contribution Only

Source: The Center for Retirement Research at Boston College




Union Workers Far More Likely to Have Pensions


Source: Bureau of Labor Statistics

45%

13%

51%

33%

70%

85%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90%

Defined Contribution

Defined Benefit

Any Retirement Plan

Private Sector Retirement Plan Participation Rates, March 2019

Union Nonunion




Trend: Private Sector Freezes


Source: Bureau of Labor Statistics

Percent of DB‐covered private sector workers by open, soft, and hard frozen plans, March 2019

62%

55%

81%

57%

78%

60%

24%

28%

26%

16%

29%

14%

17%

7%

17%

6%

11%

0% 10% 20% 30% 40% 50% 60% 70% 80% 90% 100%

All workers

Management, professional, and related

Service

Sales and office

Natural resources, construction, and maintenance

Production, transportation, and material moving

Open Soft Freeze (New hires excluded) Hard Freeze (No one accruing)




Trend: Public Sector Increasing Employee Contributions


Source: The National Conference of State Legislatures




Trend: Public Sector Reducing Pension Benefits


Source: The National Association of State Retirement Administrators




Trend: Public Sector Changing Plan Design


Source: The National Conference of State Legislatures




PublicCash Balance

Variable Benefit

Combo DB/DC

Variable Contribution

PrivateCash Balance

APP / SIP

?

N/A


“Hybrid” Designs




Trend: “Derisking” Strategies• State/Local:

o Increasing employee contributionso Reducing benefits:

• Higher age/service requirement• Reduced COLA• Reduced multiplier

o Move to hybrid designs:• Does not reduce unfunded

liability• Often has lower value than

pensiono Lower discount rates

• Increases short term costs

• Private Sector:o Termination, freeze, 401k only

• 401k value does not make up for loss of DB benefit

• Mid‐career workers most at risko Offer lump sums

• Same actuarial value?• Best for retirement security?

o Lower discount rates• Increases short term cost

o More conservative investments• Can increase costs





The Bottom Line?• Pensions and the “three legged

stool” work best for workerso 401ks were meant as a

supplement, not a substituteo About half of all workers do not

participate in any plan• Private sector employers are

moving away from pensionso To the detriment of workers’

retirement security• Compromise: “Hybrid” designs?

o Sustainable Income Plan (SIP) o Adjustable Pension Plan (APP)




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