In October, the commission heard testimony about changing the assumed rate of return on investments from 8.5% to a lower number (probably 8.0% but it Rep. King Banaian has sponsored a bill that would lower the rate to 7.5%); and it reviewed various hybrid pension plans being adopted around the nation. (A hybrid plan is part defined benefit and part defined contribution). There is no discussion about changing to a defined contribution plan.
A hybrid plan may be the direction Minnesota is heading, though it is hard to say what will happen in the 2012 session given Gov. Dayton’s strong ties to the public unions. If the unions are not on board, a Dayton veto would be expected.
Now that the public is aware of the multi-billion dollar unfunded liability in Minnesota, we have shifted our attention to the issue of “income adequacy” and “replacement rates”. When planning for retirement, we are supposed to calculate what percentage of our pre-retirement income we will need in retirement to maintain a certain standard of living.
The Minnesota state pension plans currently aim for a replacement rate of approximately 85% of pre-retirement income (including social security), which we and others have criticized as too high. The pension administrators discussed their approach (and attempted to answer critics) in the legislative study last June, see the top of page 9. The Minnesota Taxpayers Association has been an articulate critic of this approach (see Section 1-Pension and Retirement Secuity at the bottom of the first page.)
This is a very important discussion whether Minnesota continues to offer defined benefit pensions or shifts to a hybrid.
We would all like to live well in our Golden Years, but should the taxpayer be on the hook for 85% of the highest (five) earning years, without regard to how much employees contributed, the financial status of the fund or the fact that retirees (should) have lower expenses than the plans currently assume? Consider also that we have longer life expectancy. (Looked at another way, would Minnesota really choose to lower the retirement/savings security of private sector workers to maintain the current retirement security of public workers? Or to burden future generations of taxpayers with a retirement system that did not pay for itself? This may sound like hyperbole to some but these are the choices we are facing if we do not change our current assumptions about what is an adequate retirement income.)
State pensions are also designed to reward career employees and punish those who leave “early”. That approach has its merits but we have to ask what would happen if employees moved in and out of the public and private sector, bringing their talents to the private sector and perhaps bringing new skills back to the public sector. Wouldn’t the state benefit from the same mobility of talent that the private sector enjoys? Why should state employees be hand-cuffed? The pension design and assumptions would have to change to allow this; people are rational actors responding to financial incentives, especially as we age.
Pension Commission Chairman, Rep. Morrie Lanning, has asked commission members to be prepared to agree on an Omnibus bill for the 2012 session at the November meeting. Here are the remaining bills from the 2011 session. They are a mix of administrative (housekeeping) and the usual “constituent” bills (where a state employee has, for example, missed a deadline that results in a smaller pension). The problem with the constituent bills (helping an individual retiree) is that they violate the state Constitution because they are “special legislation” (here is our post on this issue from last spring).
There are also several bills aimed at “reform” including Rep. Banaian’s bill on the assumed rate of return and one from Rep. Mary Franson and Senators Hoffman and Parry that would lower the state’s contribution and raise state employees contributions.
We will keep you updated, so stay tuned!