{"id":9174,"date":"2012-06-05T07:33:33","date_gmt":"2012-06-05T11:33:33","guid":{"rendered":"http:\/\/stateimpact.npr.org\/new-hampshire\/?p=9174"},"modified":"2012-06-05T07:51:03","modified_gmt":"2012-06-05T11:51:03","slug":"pension-reform-some-myth-busters-to-follow-the-stalemate","status":"publish","type":"post","link":"https:\/\/stateimpact.npr.org\/new-hampshire\/2012\/06\/05\/pension-reform-some-myth-busters-to-follow-the-stalemate\/","title":{"rendered":"Pension Reform: Some Myth-Busters To Follow The Stalemate"},"content":{"rendered":"<p>Last week, a State Senate bill that initially sought to replace New Hampshire&#8217;s defined benefit (DB for short \u2014 think pension) plan\u00a0with a defined contribution plan\u00a0(DC for short \u2014 think 401(k)) dissolved into a stalemate. \u00a0The Senate and House were not even able to form a\u00a0commission to make recommendations addressing\u00a0the state\u2019s $4.2 billion in unfunded liability. There seems to be an inability to agree on the facts.\u00a0We mined a few sources, especially a report from the <a href=\"http:\/\/www.nirsonline.org\/storage\/nirs\/documents\/Bang%20for%20the%20Buck%20Report.pdf\" target=\"_blank\">National Institute On Retirement Security<\/a> (NIRS), to try to find some clarity.<\/p>\n<p><a class=\"fancybox\" href=\"http:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/The-Author\u2019s-Cheat-Sheet.jpg\"><img decoding=\"async\" loading=\"lazy\" class=\"alignright size-medium wp-image-9203\" style=\"border-image: initial; border-width: 1px; border-color: black; border-style: solid;\" title=\"The Author\u2019s Cheat Sheet\" src=\"http:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/The-Author\u2019s-Cheat-Sheet-300x106.jpg\" alt=\"\" width=\"300\" height=\"106\" srcset=\"https:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/The-Author\u2019s-Cheat-Sheet-300x106.jpg 300w, https:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/The-Author\u2019s-Cheat-Sheet-620x219.jpg 620w, https:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/The-Author\u2019s-Cheat-Sheet.jpg 833w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a>People assume DC plans are cheaper than DB plans for employers, and therefore for taxpayers \u2014 when it comes to public pensions.\u00a0 But that\u2019s not actually true. Economists agree that defined benefit plans are more efficient than defined contribution plans.\u00a0 There are three reasons.<\/p>\n<ul>\n<ul>\n<li>When an employer pools all of their employees\u2019 investments and risks in a single pension fund, they can spread risk over the long term, saving in the good years and spending that in the bad years.<\/li>\n<li>The pooled investments also prevent over- and under-saving, which is what happens with DC plans because individuals can\u2019t predict when they will die.<\/li>\n<li>DB plans have lower management fees because of what economists call \u201ceconomies of scale.\u201d Like buying anything in bulk, it&#8217;s cheaper to manage all of the money at once, rather than managing hundreds or thousands of individual investments.<\/li>\n<\/ul>\n<\/ul>\n<p>Because of all of these factors, DB plans provide the same benefit for 46% less than the DC plan provides. Check out <a href=\"http:\/\/www.nirsonline.org\/storage\/nirs\/documents\/Bang%20for%20the%20Buck%20Report.pdf\" target=\"_blank\">NIRS\u2019s <\/a>Figure 1. <!--more--><br \/>\n<div id=\"attachment_9175\"  class=\"wp-caption module image aligncenter\" style=\"max-width: 300px;\"><a class='fancybox' href='http:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/NIRS-bar-graph.jpg' rel='' title=''><img decoding=\"async\" loading=\"lazy\" class=\"size-medium wp-image-9175\" style=\"border-image: initial; border-width: 1px; border-color: gray; border-style: solid;\" title=\"NIRS bar graph\" src=\"http:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/NIRS-bar-graph-300x271.jpg\" alt=\"\" width=\"300\" height=\"271\" srcset=\"https:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/NIRS-bar-graph-300x271.jpg 300w, https:\/\/stateimpact.npr.org\/new-hampshire\/files\/2012\/06\/NIRS-bar-graph.jpg 357w\" sizes=\"(max-width: 300px) 100vw, 300px\" \/><\/a><p class=\"wp-media-credit\">NIRS<\/p><\/div><br \/>\nSo why have so many employers switched to defined contribution plans?<\/p>\n<ol>\n<li>Smoke and mirrors.\u00a0According to research by economists Theresa Ghilarducci and Wei Sun, when employers switch out of DB and into DC plans, they almost always cut the average employee benefit in the process. So while the same benefit will be cheaper in a DB than in a DC plan for both the employer and the employee, employers are using the transition as an opportunity to cut overall benefits.\u00a0That makes things cheaper for the employer, but not for the employee.<\/li>\n<li>Risk Divestment. Defined contribution plans, while less efficient, put all of the risk in the employee\u2019s hands. While this may be good for savvy investors, it is not so good for your average employee. So while employers could get more bang for their buck with a DB plan, with a DC plan they move financial risk from the company to the employee.<\/li>\n<\/ol>\n<p>Another perk to DC plans is that they are very mobile, something useful in an era of high employee turnover.\u00a0 But that\u2019s actually a detractor for businesses: employee turnover is expensive, and the old-fashioned DB pension plans encouraged employee loyalty.<\/p>\n<p>If traditional DB plans are so great, why are state DB pension plans \u2014 like New Hampshire\u2019s \u2014 in so much trouble?<\/p>\n<p><div class=\"related-content alignright\"><h4 class=\"related-header\">Related<\/h4><div class=\"links\"><h5>Posts<\/h5><ul><li class=\"link\"><a href=\"http:\/\/stateimpact.npr.org\/new-hampshire\/2012\/02\/13\/where-nh-residents-depend-on-government-benefits-the-most\/\">Where NH Residents Depend On Government Benefits The\u00a0Most<\/a><\/li><li class=\"link\"><a href=\"http:\/\/stateimpact.npr.org\/new-hampshire\/2012\/06\/05\/pension-reform-an-introduction\/\">Pension Reform: An Introduction<\/a><\/li><li class=\"link\"><a href=\"http:\/\/stateimpact.npr.org\/new-hampshire\/2012\/05\/18\/qa-why-theres-more-to-the-skills-gap-than-a-worker-shortage\/\">Q&amp;A: Why There\u2019s More To The \u201cSkills Gap\u201d Than A Worker Shortage<\/a><\/li><\/ul><\/div><div class=\"topics\"><h5>Topics<\/h5><p class=\"topic\"><a href=\"http:\/\/stateimpact.npr.org\/new-hampshire\/topic\/pension-system\/\">Pension System<\/a><\/p><\/div><\/div>That seems to have less to do with the kind of pension fund, and more to do with the ways that states have been investing them.\u00a0One problem is that states like New Hampshire haven\u2019t been saving during the good times to prepare for the bad times.\u00a0Instead they\u2019ve provided bigger and better benefits in the good times, only to find they can\u2019t sustain them during a recession.<\/p>\n<p>Another reason was recently laid out by Mary Williams Walsh and Danny Hakim in the<a href=\"http:\/\/www.nytimes.com\/2012\/05\/28\/nyregion\/fragile-calculus-in-plans-to-fix-pension-systems.html?_r=1&amp;pagewanted=all\" target=\"_blank\"> New York Times<\/a>. They explained that while most public pension funds are assuming an unrealistic 7 to 8 percent (New Hampshire assumes a 7.75 percent) rate of return on investment, today the realistic expectation would be more like 3 or 4 percent \u2014 individuals are only seeing 1 percent on their 401(k)s, afterall. \u00a0But\u00a0lowering the anticipated rate of return even three-quarters of a percentage point sends unions, taxpayers and voters into a tizzy.\u00a0As the Times reported, \u201cwhen Rhode Island\u2019s state treasurer, Gina M. Raimondo, persuaded her state\u2019s pension board to lower its rate to 7.5 percent last year, from 8.25 percent, the president of a firemen\u2019s union\u00a0accused her of \u2018cooking the books.\u2019\u201d<\/p>\n<p>As the Executive Director of the New Hampshire Retirement System George P. Lagos explained in a<a href=\"http:\/\/www.nhrs.org\/documents\/NHRS_Sen_Bradley_Letter_05_17_12.pdf\" target=\"_blank\"> letter to Senate Majority Leader Jeb Bradley<\/a>, the New Hampshire Retirement System Trustees have more than once supported a study commission and endorsed adequate funding for it, to better understand the issues surrounding a transition to a defined contribution plan, before committing the state to such a potentially expensive change.<\/p>\n<p>An editorial by the Concord Monitor <a href=\"http:\/\/www.concordmonitor.com\/article\/327857\/some-better-options-for-pension-reform?SESSb1e19f76185f759d7d003d7b15dc35e5=google\" target=\"_blank\">recently suggested<\/a> that alternatives should be discussed, including hybrid plans that combine both DB and DC plans \u2014 a system supported by the National Institute On Retirement Security, the organization responsible for much of the information in this article.<\/p>\n<p>Was this article helpful? Do you think we got it all wrong? Let us know. Leave a comment below, or send us a message on <a href=\"https:\/\/www.facebook.com\/StateImpactNH\" target=\"_blank\">Facebook <\/a>or <a href=\"http:\/\/twitter.com\/StateImpactNH\" target=\"_blank\">Twitter<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>Last week, a State Senate bill that initially sought to replace New Hampshire&#8217;s defined benefit (DB for short \u2014 think pension) plan\u00a0with a defined contribution plan\u00a0(DC for short \u2014 think 401(k)) dissolved into a stalemate. \u00a0The Senate and House were not even able to form a\u00a0commission to make recommendations addressing\u00a0the state\u2019s $4.2 billion in unfunded [&hellip;]<\/p>\n","protected":false},"author":84,"featured_media":9175,"comment_status":"open","ping_status":"closed","sticky":false,"template":"","format":"standard","meta":[],"categories":[474,53,14],"tags":[321,320],"acf":[],"_links":{"self":[{"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/posts\/9174"}],"collection":[{"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/posts"}],"about":[{"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/types\/post"}],"author":[{"embeddable":true,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/users\/84"}],"replies":[{"embeddable":true,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/comments?post=9174"}],"version-history":[{"count":0,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/posts\/9174\/revisions"}],"wp:featuredmedia":[{"embeddable":true,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/media\/9175"}],"wp:attachment":[{"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/media?parent=9174"}],"wp:term":[{"taxonomy":"category","embeddable":true,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/categories?post=9174"},{"taxonomy":"post_tag","embeddable":true,"href":"https:\/\/stateimpact.npr.org\/new-hampshire\/wp-json\/wp\/v2\/tags?post=9174"}],"curies":[{"name":"wp","href":"https:\/\/api.w.org\/{rel}","templated":true}]}}