So let's see some of the reasons why the report felt staying with WRS' defined benefit plan was the best way to go. I'll start with a report on a similar study by one of our underfunded neighbors. (in much of this report, the defined benefit pension system is referred to as "DB" and the 401 (k)-like Defined Contribution system is called "DC")
Minnesota released a study last year on switching to a DC plan, with the following key findings:And the study also points out that studies from both California and New York City show that DB plans are much cheaper to run, and usually have better returns that 401(k)-style DC plans.
1. High transition costs Mercer’s actuarial analysis indicated there would be a $2.76 billion transition cost to Minnesota over the next decade if Minnesota moved from a DB to DC plan for new hires. These transition costs are similar to those found in studies done by other states such as Nevada, Kansas, Rhode Island, New Mexico, and Missouri.
2. Long term costs higher Mercer found that with a funding structure of 5% employer and 5% employee contributions, the ongoing cost of the existing Minnesota DB plans would be less than the cost of a future replacement DC plan.
3. Higher liabilities Employees exiting the DB plan would decrease the funding available, requiring higher contributions. (Note from Jake: this is a great idea if you want to FUBAR the DB pensions and cause a fiscal crisis through mass retirements)
4. Smaller retirement accounts DC plans run the risk of providing inadequately- funded retirement incomes that may lead to higher public assistance costs.
5. Higher fees DC’s grant many individual employees more control over investments, but individuals usually incur higher investment fees and lower returns.
6. Lower efficiency DB plans can provide the same level of income at roughly half the cost of a DC plan because of DB’s superior investment returns and ability to pool longevity risk.
The experience in Wisconsin with the WRS echoes these positive attributes in other states, and is relatively efficient and inexpensive. The report mentions that
ETF administers the WRS and other benefit programs. ETF’s administrative expenses for fiscal year 2011 were $27,474,300.41 Administrative costs are financed by a separate appropriation and are allocated to the benefit plans in accordance with Wis. Stat. § 40.04. The sources of funds for this appropriation are investment earnings and third-party reimbursements received from the various programs administered by ETF. The State of Wisconsin Investment Board incurs expenses related to investing the trust funds. As authorized by Wis. Stat. § 25.187 (2), these costs are charged directly to the investment income of each fund. State general purpose revenue raised via taxes collected from Wisconsin citizens does not contribute directly to the administration of the WRS.Along with ETF operations, pensions don't burden local budgets in Wisconsin as they do in the rest of the U.S. (1.26% of Wisconsin gov't budgets vs. 2.9% nationwide, as it says on Page 26). This seems to be a small price to pay for a huge amount of stability for a large amount of Wisconsinites, which is paid off in added economic activity in our communities many times over.
(Jake note: Walker's own report says NOT A DIME comes for WRS administration comes from the general taxpayer. Please remember this if Walker or Sykes or some other liar tries shenanigans on pensions down the road.)
Administration of the WRS has proven to be very cost efficient. According to a recent public pension fund administration study:
. Annual per-member administrative expenses associated with WRS retirement and disability programs was $51 per member; the median per-member cost of peer systems was $79; and
. ETF employs on full-time equivalent staff person per 2,100 members, compared to the peer median of one per 1,500 members.
The report notes that a big reason that WRS maintains its funding is that it is able to adjust pension payments and contributions as the stock market and other investments go up and down.
The “risk sharing” nature of the WRS, which is fairly unique among public employee pension systems, has helped keep WRS funding relatively stable and capable of paying retirement benefit promises. Participants benefit from positive investment returns and share the risk of negative investment returns. Taxpayers do not bear all of the risk of the WRS. For example, retirees have had their pensions reduced by over $3 billion in the past several years.And yes, that might mean that there is some short-term pain for both pensioners, or for current WRS workers. In fact, just in the last week the ETF has mentioned that both public employees and taxpayers may need to pay about 0.50%-1% more next year. This is the source of the $87 million screw-up that Walker and WisGOP made as part of Act 10, as it required half of the contribution to be kicked in by taxpayers in all circumstances. (These things happen when you try to sneak in a major overhaul in less than a week without hearings)
Changes in employer and employee contribution rates, for example, are linked to trust fund investment performance. In essence, when returns are high, contribution rates can be decreased; when low, rates may have to be increased. Rate changes are determined each year and are effective the following January.
So naturally, this should end the debate as to whether to tinker with the WRS for the next several years, right? OF COURSE NOT. Check out the weasel words from our fair Governor.
"The report released today confirms that both taxpayers and pensioners are getting a great deal with the WRS," Walker said in a statement. "Compared to other states, Wisconsin consistently rates among the best-performing public pension systems in the country."Currently not planning to make any substantial changes"??? What kind of crap is that? I'm no Marty Beil fan, but he's right on the money when he says we need to be vigilant with these ALEC lackeys at the Capitol.
"I want to be very clear: I am currently not planning to make any substantial changes to the WRS. However, I will continue to work to ensure that the WRS is fiscally sustainable for both taxpayers and retirees."
In fact, we need to make this dodged bullet a campaign issue, and make all legislators promise that they won't touch the WRS. And if the politicians use Walker-style weaseling, shout from the rooftops that they're going to sell off WRS to Wall Street slime. and use it against them for the 2012 legislative campaigns. To the WisDems' credit, they're looking to not only protect the WRS, some like Sen. Dave Hansen are looking to expand WRS buy-in to private sector workers and small businesses. And as part of that idea hopefully comes a thought that many private sector workers should have:
"If WRS is being run cheaper and better, and gives public employees a stable retirement, why isn't the same thing happening to me and my neighbors in the private sector?"
Yep, why indeed?