Reuters: Regulatory News: US public pensions try everything but 401ks to close gaps-study

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US public pensions try everything but 401ks to close gaps-study Dec 5th 2012, 12:59 WASHINGTON | Wed Dec 5, 2012 7:59am EST WASHINGTON Dec 5 (Reuters) - Since the latest recession, almost all U.S. states have changed their public pensions, but none have opted for the reform frequently promoted as the path toward financial stability: switching to retirement plans similar to those in the private sector. A study released by the National Institute on Retirement Security on Wednesday found that 45 of the 50 states have enacted pension reforms since 2008, mostly increasing employee contributions, reducing benefits for new hires, changing retirement ages and lowering annual benefit raises for retirees. But the institute, which analyzes pensions and workers, found that since 2005 no state has shifted exclusively to offering defined contribution plans, frequently called by their identifier name in the tax code, 401(k)s. Defined contribution plans can reduce financial risks for states. But expenses may overshadow promises of stability and employees often can have lower benefits, NIRS found, adding that taxpayers' dollars simply do not go as far as in a traditional pension. "Providing the same retirement income from a traditional pension costs nearly twice as much - 83 percent more - when funded through a 401(k)-style account, representing an inefficient use of tax dollars," NIRS said. A handful of retirement systems have for a while offered defined contribution plans - where employees contribute money to be invested and then paid out upon retirement. Others have recently created hybrid plans using some components of traditional pensions, also known as defined benefit plans because they pay retirees set amounts. While employers and employees put money into public retirement systems, the bulk of pension revenues come from investments. When returns on investments fall, states are supposed to boost contributions. During the financial crisis and resulting recession, states cut contributions just as a falling stock market caused pension revenues to plummet. State and federal lawmakers worried that other public programs would be sacrificed to honor promises to retirees. Since reaching their nadir a few years ago, public pension funding levels are slowly rising. In the third quarter of 2012, they achieved median returns of 4.67 percent and for the year ended Sept. 30 they had a median return of 16.68 percent, according to a Wilshire Associates report released last month. Still, a gap remains, with retirement systems short a total of $757 billion in covering future benefits, according to Pew Center on the States. At the local level, retirement benefits have recently helped drown the budgets of cities and counties, such as San Bernardino, California. And some federal and state lawmakers have proposed defined contribution plans as more solid alternative systems that will leave governments less exposed. U.S. private sector employers have been phasing out pensions for decades, switching to defined contribution plans. But the public sector faces huge costs in making a similar switch and reaps fewer rewards, NIRS found. The reasons for the changes in the private sector do not apply to governments, NIRS said, including "structural changes in the industrial makeup of the economy, business strategies pursued by U.S. corporations in the context of economic restructuring, and ensuing changes in employment relations." Meanwhile, according to NIRS, using only defined contribution plans or hybrids in the public sector "have led to reduced benefits for affected workers." Many states would only be allowed to offer defined contribution plans to new hires, essentially forcing them to run two parallel retirement systems for decades. Costs rise from the added administrative expense, and because new employees' money does not help support the benefit payments to current retirees. "Defined contribution accounts do indeed shift investment risk and market risk from employers to employees," according to NIRS. "However, defined contribution accounts also entail fundamentally greater overall risk and marked inefficiencies compared to ... pensions. These risks and inefficiencies translate to significantly higher funding costs." Link this Share this Digg this Email Reprints

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