JOHN REITMEYER | MARCH 6, 2017
Lowering rate of return on fund investments will help, but some experts argue full actuarial payments — not called for in Christie budget address — remain critical
New actuarial calculations for New Jersey’s beleaguered public-employee pension system show an unfunded liability of near $50 billion, a staggering number for a retirement plan that’s been set up to cover roughly 780,000 current and retired government workers.
But many financial experts believe the pension system’s funding problem is potentially much worse, because the state has for decades been using optimistic assumptions when it comes to projecting annual investment returns.
The $72 billion pension system’s assumed rate of return, or discount rate, for the past few years has been 7.9 percent, which is higher than the average returns of just over 7 percent that the pension system has realized over the past 20 years. Gov. Chris Christie, a Republican who has stressed pension reform during his two terms in office, announced last week that the rate will be lowered to a more realistic 7.65 percent.
While the difference seems subtle, pension experts say the downward adjustment is good for the retirement system’s overall long-term health because it will generate a more realistic assessment of the unfunded liability, and that in turn will require the state to make more robust annual contributions in the ongoing effort to maintain the fund’s solvency.
Christie’s efforts — the reduction is just the latest to occur during his tenure — also line up with calls for more realistic accounting that have come from Senate President Stephen Sweeney (D-Gloucester), the Legislature’s leading Democrat on issues related to pension funding and employee benefits
Tick, tick, tick, tick….This Ponzi scheme is about to blow. Will the unions force the state into bankruptcy and get nothing or renegotiate a more sustainable solution before that? Your call boys.
Gravy train wreck pending
It’s much more than $50bn when you consider NJ still sees an assumed rate of return of 7.65% vs 20 year actual annualized returns 7.2% and current long term treasury yields 3.11%. Add in the fact that NJ still uses old actuarial statistics on mortality, and the truth is retirees are living longer than we currently assume in our state pension plans by 2-3 years. We now have many more retireees drawing a pension for more years than they actually served and contributed to their own pension. Classic Ponzi scheme, and even the unions and retirees know it but just expect the state and municipalities to keep raising taxes by 25% to keep their gravy train rolling. This is government sanctioned theft of taxpayers, nothing less.
NJ pension funds cut checks to retirees worth over $10bn last year versus pension plan assets of $72bn. The problem is the benefits are too generous. At the current cash burn rate, the funds will be insolvent in less than a decade, with liabilities far in excess of plan assets. Think about that: we pay out over $10 billion per year in public pension benefits to retired public sector workers. So even with assets of over $70 billion, the system is fragile. Public pension plan and health care benefits need to be diminished before taxes can be raised further as we are already the highest taxed residents of any state in the nation. Start by lowering the assumed annual rate of return to 7%, use the updated actuarial mortality data to add 2-3 years of life expectancy to the liability. Then start moving all new hires to defined contribution pension plans like 401(k) plans to prevent politicians and unions from meddling with employee pension assets. If the pension assets are in the hands of the employees and not the state and municipalities, they will be protected. Then convert all current employees from Platinum to Bronze level health coverage, which is the equivalent of what is offered in the private sector. Only then can taxes be raised for funds specifically earmarked to close the pension liability gap.
The math doesn’t work. The net asset value of the Pension Fund assets managed by the NJ State Investment Division was $72.9bn as of June 30, 2016. 41% of the 785,000 members in seven public pension systems are retired versus 51% of the members who are still working and contributing to the pension plans, while 8% are vested members no longer accruing benefits but not yet retired. That 41% of 785,000 = 321,850 retirees being supported by only 400,350 members still contributing to the plan, i.e. 1.24 workers per retiree. You need over 2 workers for every retiree to have a solvent plan, so already this is a mess with too few employees contributing to a system with too many retirees. Those 321,850 retirees draw annual pensions on average worth $31,070 but this number will explode as baby boomers retire through 2024. For example, note twelve of the fifteen +$100,000 a year public pension retirees in the Village of Ridgewood as of 2015 were police & fire, with only three from the BoE. But we just had seven more policemen retire in 2016. Once the baby boomers all retire, there are potentially less workers than retirees in NJ, which is the definition of a PONZI scheme with $10bn a year paid to plan beneficiaries vs. plan assets $72.9bn.
The term “unfunded liability” is a scare tactic to influence the ignorant masses (or posters here)…. here is a somewhat lucid explanation…. https://www.theatlantic.com/business/archive/2012/11/is-our-debt-burden-really-100-trillion/265644/
In 10 years when there are more public sector retirees than employees contributing to their pension plans, and no assets left in the plans versus annual promised pension checks over $20bn just in NJ, the pension piggies will be held to account. Private sector taxpayers aren’t cleaning up this mess.
The joke here is that in order to pay out $10bn in pension checks again this year, the pension plans need to earn 13.71% annual returns on their current $72.9bn in assets, or 13.22% if you include Christie’s record $2.5bn state pension contribution this year (after diverting lottery funds) and annual participant plan contributions of $225mn in the asset base. These plans have earned an average of only 7.2% over the past 20 years and 30 year US Govt Treasury yields are only 3.11%. And now the unions want to control the investments more (so they can asset strip). DISASTER!
To Anonymous March 8, 2017 at 1:58 am
It’s obvious you want to blame the government workers for what the past Governors since Whitman are responsible for.
That’s like blaming the person who puts their money in the bank and making them pay when the bank gets robbed.
Read this and educate your self please.
https://www.nj.com/politics/index.ssf/2015/01/how_did_nj_get_into_this_pension_mess.html
New Jersey’s pension funds were flush at the turn of the 21st century. But since 1996, governors from both parties have been underfunding the system, making payments far below what actuaries recommend.
The state skipped payments altogether from 2001 to 2004, when the annual required contribution called for $2.8 billion. And while the state was taking a pension holiday, it increased benefits for employees.
Nice FAKE union facts above. Just where DID the money go then? On property tax reduction? Or on pet union projects? Oink oink.
The only FAKE comment is yours 6:48 am!
The comment at 11:25 am was a direct quote from the real news website NJ.com. Do you have any facts to back your FAKE comment?
https://www.nj.com/politics/index.ssf/2015/01/how_did_nj_get_into_this_pension_mess.html
Here is where the money went 6:48 AM, read it a weep…..
the State, in full compliance with the standards then in place, to discontinue making contributions to the funds. While there were clear warnings then that this could lead to huge fiscal problems in the future, at the time it permitted hundreds of millions of dollars to be diverted to other purposes ranging from education to tax relief….
.
Page 15 of the Status Report of the New Jersey Pension and Health Benefit Study Commission which was issued on September 25, 2014