Are Our Pensions Next?

In a little discussed or noted provision in the current state budget, the Governor ordered a study of the WRS pension system. Specifically, the study is to report on the potential for conversion of the current WRS into a defined contribution plan and to end the current defined benefit plan.

In brief, a defined contribution (DC) plan is one in which the benefit is directly determined by the amount of principle and interest contributed by the annuitant. 401-K’s are the most common forms of DC plan instruments. They are typically managed by private investment firms.

A defined benefit (DB) plan is based on a formula of salary as a multiple of years of service and other constant factors. Our DB plan is managed by a state agency, Employee Trust Funds.

In the past twenty years, there has been a massive shift in the private sector from DB plans to DC plans. At the same time there is a movement spearheaded by American Legislative Exchange Committee to remove public employees from DB plans and shift them to DC plans. Given the fact that the WRS now holds $80 billion in assets this would be a huge windfall to “money managers” who would oversee the individual accounts.

This proposal now being “studied” by the Secretaries of the Departments of Administration, Employee Trust Funds and Employment Relations is to report to the Governor and the Joint Committee on Finance by June 30, 2012. This is significant because it bypasses the Joint Survey Committee on Retirement and Pensions. By law, the legislature cannot consider a bill in regard to pensions that is not authored by the Joint Survey Committee and accompanied by an actuarial report. But, of course, the law can be changed.

The Wisconsin Retirement System is considered to be one of the best in the nation with obligations funded at over 99%. Nonetheless, it would not take many changes to begin set the wheels of a crisis in motion. There are many potential scenarios:

  • One scenario already underway is the sharp increase in retirements prior to July 2011. State employees (non-University) retirements tripled from 2010 to 2011. School district and UW retirements doubled in the same period. Given budget cutbacks many of these employees were not replaced and those that were are commonly paid at half the salary of the prior position incumbent. This is a huge unanticipated outflow of pension funds that will not be replaced with a comparable receipt of new contributions for many years.
  • Wages and salaries continue to be frozen or decline among public employees providing less revenue into the fund. With investment income flat or at best highly unstable, the capacity of the WRS to meet obligations continues to decline.
  • As we approach summer, Walker (presuming he continues to be Governor) announces another budget shortfall. As he did in the last budget, he proposes to “borrow” hundreds of millions (last time it was $70 million) from the pension fund. It will, of course, be for a good cause such as paying for employees’ health insurance premiums (as it was the last time). Thus, in the face of swelling retiree rolls, reduced contributions due to lower salaries and fewer employees and a stagnant market for investments, the fund capacity to meet near-term obligations is sharply diminished.

The Governor and the leaders of Joint Finance, particularly Rep. Vos are ready to meet this crisis head on. And the solution will address two problems: 1) the inability of the public agency, ETF, to meet the state’s obligation to retirees and 2) the unfair inequity between public employees who enjoy a lavish and wealthy retirement (insert here a factoid about married, masters prepared high school teachers with 30 years of service and have a combined pension of $65,000/year) compared to those in the private sector (insert here numerous facts on the plight of most in the private sector, e.g. one-third live solely on their social security payment, the remainder have an average value of $50,000 in savings + pension, etc.).

The barrage of policy attacks is being ramped up. The Wall St Journal published one of many attacks on public employee pensions on 1/4/2012 and offered the alternative of defined contribution plans. A general review of the model of the attack by the author of the article can be found here. If the “money management” industry was unable to get its hands on the social security trust funds, the next biggest treasure are public employee pensions.

Some organizing in response to this attack is underway. A few meetings of retirees and current public employees have been held around the state. Though there has been little discussion of the issue on campus, there is no doubt that there will be substantial concern when this information is disseminated and the study report is released.

To receive more information on the effort, contact powrs2012@gmail.com or wiununion@gmail.com.

 

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6 Responses to Are Our Pensions Next?

  1. Admin says:

    Readers of the above article might also be interested in this earlier one from March 1 of last year, which addresses some of the same issues: https://siftingandwinnowing.org/2011/03/01/does-governor-scott-walker-have-a-smoking-gun-buried-in-the-budget-bill/

  2. Mark Werner says:

    The review does not state anything about ending the DB plan.

    From the budget repair bill.

    This bill also requires the secretary of administration, the director of the Office of State Employee Relations (OSER), and the secretary of employee trust funds to study the WRS. The study must specifically address establishing a defined contribution plan as an option for WRS participating employees; establishing different vesting periods for employer contributions and eligibility for WRS retirement benefits; modifying the supplemental health insurance premium credit program for state employees; and permitting participating employees to not make employee required contributions under the WRS and limiting retirement benefits for these employees to a money purchase annuity. Under the bill, no later than June 30, 2012, the secretary of administration, the director of OSER, and the secretary of employee trust funds must report their findings and recommendations to the governor

  3. John Roberts says:

    The wording of this bill is very misleading. Based on the definitions the ETF is a defined contribution plan.

    And this article is very misleading. The ETF is currently a defined contributions plan, not a defined benefits plan as stated in this article. The defined contributions are about 10 or 11% of our salaries and wages. The benefits are calculated based on years of service and dollar contributions to the ETF plan. This amount is increased or decreased depending on the net worth of the ETF funds. The increase or decrease for the variable fund is annual, for the fixed fund it is five year averaged. The only variance from this is that the monthly payout from the fixed fund is guaranteed not to go below the initial monthly amount. The Variable portion could potentially go to zero. Just like a 401K.

    The ETF is 99% funded, thus is not a Ponzi Scheme like social security. So the changes that “could set the wheels of crisis in motion” can not do so.

    Increased retirements: The money is there, so no effect on the fund. No crisis.
    Wages frozen: Reduced benefits to employees later but no effect on the fund. No crisis.

    Also Walker borrowing from the fund is not likely as it was tried before and found to be illegal by the courts. Not to say we shouldn’t be alert to any possible shenanigans, we should.

  4. David Ahrens says:

    Mark’s comments refer to the budget repair bill. Two provisions of the repair bill (ACT 10) were enacted: increasing the vesting requirement (to 5 years) and increasing the numbers of hours/year for participation (1200). Two of the other items were included in the budget bill (ACT32). THey are the study on voluntary participation in the retirement plan – a poison pill. And to study conversion to a defined contribution plan (which is mentioned in the first paragraph of the article).
    In regard to John Roberts comments: By any measure, the WRS as currently constituted is a defined benefit plan. Market forces on an annuitant’s specific contribution does not affect the benefit because……it is defined.
    The notion that social security is a “ponzi scheme” is absurd.
    The fact that the fund at last audit was 99% funded was based on prior rate of retirement. There is little doubt the fund has the capacity to fully fund current annuititants in the near term. However, to say that the phenomenal change in rate of retriement is “no problem” and that downscaling of wage contribution is “no problem” belies the simple math of any annuity scheme. Less money in will mean less money out.
    If a voluntary system is enacted (per Bush’s attempt on social security) it will cut off the flow of new funds and quite rapdily decrease the capacity of the fund to meet its obligations.

  5. Admin says:

    New development just reported by Journal-Sentinel: “Walker nominee Petersen withdraws nomination to investment board.” http://tinyurl.com/6wxtj3v

  6. Scrabble Player says:

    This seems to be the main goal of Walkers’ regime. Busting unions is only a step toward control of huge amounts of money from many years of savings (yes they are savings not handouts because all pension contributions are part of the negotiated salary). Manufactured crises is the tactic, stealing is the goal.

    This is exactly what has happened in Europe….Europe is not poor, so why so many crises and “austerity” measures? It’s to simply grab the loot. In one country, 60% of the pension fund was forced by government to “buy” 99% stocks of a failed bank and is now paying out full amounts to all prior corrupt investors. In a few years, no more pensions…..

    Well, it’s clear what has happened- elite are stealing the pension after stealing from the banks. As long as the politicians are not held personally responsible for abetting the robbery, it will continue. That is why the recall is the first step as a warning other politicians. The fight is much bigger than saving union rights.

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