New Jersey Senate President Stephen Sweeney recently presented his plan to improve the solvency of the state’s public pension systems. Judging by town halls on this proposal, the overarching response of union members to this plan has been, “Don’t touch our pensions!” However, Sweeney’s reform would actually increase the retirement security of public workers and improve the state’s finances without touching the pensions of those who are already vested in their plan.
Sweeney recently introduced a package of 27 bills, coined the “Path to Progress,” which intended to fix several of the state’s fiscal problems. The pension portion of the reform — Senate Bill 3753 — is particularly important. Currently, the teachers’ and public employees’ retirement systems are short by nearly $48 billion, and have less than 60 percent of the money they’d need to fulfill all of the retirement promises already made. What should be concerning to all New Jersey workers and taxpayers, the money needed for other services like roads and teachers’ pay is being diverted to pay off this growing pension debt.
Sweeney’s proposal makes three key changes.
First, it puts new and unvested workers into a “stacked” hybrid retirement plan with less financial risk to taxpayers. Under this plan the first $40,000 of income is subject to the same pension plan that currently exists, but anything over that amount is subject to a pension-like “cash balance” plan that provides a guaranteed minimum investment return—four percent—and downside risk protection not seen in typical defined contribution or 401(k)-style plans. Retirement income for these public workers would still be guaranteed, since employees’ retirement funds in both the traditional pension and cash balance plan would be shielded from tumultuous market results.
Second, the proposal raises the retirement age from 65 to 67 for new and unvested workers. This move is on par with the national trends of rising life-expectancy and self-reported retirement expectations, suggesting that the adjustment to the retirement age for future workers is appropriate.
Third, Sweeney’s reform plan attempts to save taxpayer money by making sure pension debt is paid down faster. Like any debt, structuring pension debt payments over fewer years brings down the interest and total amount that the pension system—and thereby taxpayers—have to pay in the long-run. This would also bring the plan to full funding faster, better ensuring enough money to pay out promised benefits.
While affecting primarily new hires, the hybrid plan and increased retirement age will certainly be a change for those workers with less than five years of service by 2020. But retirement benefits for this group will still be very attractive when compared to most other employment options. Enrollees will still have the same pension benefits applied to the first $40,000 of income, which will provide guaranteed and stable lifetime benefits. The additional amount that will go into the cash balance plan will also be protected by a guarantee of minimum annual returns, and it will also provide stable lifetime benefits to retirees.
Concerns from workers directly impacted are to be expected, but, overall, the change to the benefits for future workers would be minimal and the benefits the state and taxpayers derive from the reform would be substantial. Sweeney’s office estimates that the proposal would save the state $17.1 billion in pension contributions over the next 30 years and save local governments $7.6 billion over that same time.
Importantly, the proposed reform would have no effect on the retirement benefits of those already vested in their pension plan. If anything, it is doing right by existing and future public workers by taking crucial steps to ensure that they get the benefits they earn and are promised.
There are a lot of strong opinions and loud voices surrounding this debate, but updating the retirement systems of New Jersey’s teachers and public employees is a crucial step towards improving the state’s fiscal health and future prosperity. Overburdened by one the highest income taxes in the nation, and one of the lowest credit ratings — consequences of huge unfunded liabilities — the state simply cannot keep accumulating more pension debt. Sweeney’s proposal would lower future costs and pay off existing debt faster, while ensuring that future employees are protected against market risks.
This article originally appeared in the Star-Ledger.