New Jersey passes law requiring increases in employee contributions
(Reuters) — The United States is entering the next round of a nationwide boxing match over public pensions, with states approving changes to the funds, a leading municipal union challenging claims of yawning shortfalls and a research group advocating moderation.
All this comes as the Governmental Accounting Standards Board meets this week to consider how to change and strengthen pension funds' financial reporting.
On Tuesday, New Jersey's governor signed a law requiring increases in employee contributions into the state's pension system along with an end to cost of living increases for benefits. Meanwhile, Connecticut's public employee unions last week rejected the governor's proposal to have workers pay more for benefits.
Most money to pay retirees comes from earnings on pension fund investments, which were devastated during the financial crisis. As states' revenues collapsed after the longest and deepest downturn since the Great Depression, many also cut funding contributions to the plans each year.
While almost everyone agrees that pension funds have enough money on hand to pay current retirees, taxpayers and investors in the US$2.9 trillion municipal bond market are growing increasingly nervous about how they will cover costs in the coming decades.
In a report released on Wednesday, the National Institute of Retirement Security said it identified policies that "taken together, increase the likelihood of maintaining a well-funded pension plan at an affordable cost."
The group found that in the best-managed plans, employers maintain their annual required contributions, employees help share in the cost of the plan, actuaries assess changes and adjustments, and funds rely on reasonable economic assumptions.
"While the Great Recession has presented some funding challenges to public pensions, when the economy recovers, government entities will have to compete for talent with private sector employers — who may be able to offer higher salaries, stock options or profit sharing programs," the group said. "Providing an adequate and affordable pension benefit is one way to help attract a quality workforce."
The group primarily found that pension funds that were well-funded before the recession are still in good shape, but those that had looser management are suffering.
On Tuesday, the American Federation of State, County and Municipal Employees hit back at a report by Joshua Rauh of Northwestern University and Robert Novy-Marx of the University of Rochester that concluded each household in the U.S. will have to increase its tax payment by US$1,398 every year for the next 30 years to fully fund pensions,
"The reasons we have contribution increases now is to make up for investment losses," said Steve Kreisberg, director of collective bargaining at the union, on a call with reporters.
Kreisberg said individuals in the private sector are also having to temporarily compensate for market losses in their 401(k) retirement accounts. He noted that as the stock market has recovered, pension investments have achieved healthy returns. By making more money on investments, funds will not have to pass on a hefty bill to the taxpayer, he said.
