The ‘hidden squeeze’ from NJ pensions, as retiree numbers mount
TRENTON – A recent report studying New Jersey’s public worker pension plans says “the picture is even gloomier than originally thought” despite a record state pension contribution this year, with one fund already having more retirees than active workers.
The report for the conservative Garden State Initiative by senior fellow Andrew Biggs of the American Enterprise Institute said almost all public pension funds in the United States have funding issues to one degree or another but that New Jersey is among the lowest funded, along with Illinois and Kentucky.
The state got there through years of contributing less into its pension funds – usually, far less – than what actuaries recommended. The report says that from 2001 to 2018, the Public Employees’ Retirement System got 48% of its recommended contributions. The Police and Firemen’s Retirement System got 56%. The Teachers’ Pension and Annuity Fund got only 18%.
Employees were making their full contributions, as required.
'A hidden squeeze'
That led to what Biggs called “a pretty precipitous decline” in the pension systems’ funding levels. This fiscal year is the first in a quarter-century in which the state made its full payment, $6.9 billion. But the majority of that isn’t paying for services that workers are providing the public this year.
“A lot of the contribution that is going into pensions, billions of dollars, is to pay for unfunded liabilities from past years,” Biggs said. “And that’s just I hate to say money down the drain, but the point is it is not money that the taxpayer today is getting something in return for. They are paying today for contributions that should have been made in the past.”
“It is a hidden squeeze on the value the residents of New Jersey are getting from government, that more and more of what they’re paying for isn’t actually producing more and better government,” he said. “It’s simply paying off debt that it’s run up in the past.”
Changes to consider
There isn’t a magical way out. Biggs has three suggestions.
Have workers share some of the investment risk by requiring them to pay some of the shortfall if the riskier investments the state is pursuing lose money. He said Utah and Nevada do this now. He said as the number of retirees grows, the state should shift money into safer bonds rather than private equity and hedge funds – but isn’t.
“If the returns are low, both the employer – meaning the government and the taxpayer – and the employee, they both contribute more,” Biggs said. “And that spreads that risk between employers and employees, but it also gives employees some incentive to think about how much investment risk their plans are taking.”
In 2001, there were 2.7 workers paying into the Public Employees Retirement System for each retiree. By 2019, it had 1.4. The Police and Firemen’s Retirement System already has more retirees than workers in 2019.
“Over the past 20 years, as the participants have aged, the population has matured, they should have taken less investment risk. They’ve actually taken more investment risk,” Biggs said.
“So, they’re taking investment risk precisely as they’re less able to bear investment risk,” he said. “They’re so desperate to restore the plan to funding but they don’t want to make people pay more into it, so they say, ‘Let’s just gamble. Let’s just take a lot of investment risk and hope it plays out.’ But this is like somebody who goes to Atlantic City, I guess, and they’ve lost a lot of money and they say, ‘Well, let’s just stay at the table and try to win it back.’ And usually that doesn’t work out very well.”
Make workers pay more into the pensions. The report says the contribution rate for workers has gone up from 5.4% to 7.7% of wages during the span in which the government went from less than 1% of wages in 2001, when it began severely shorting its payment, to over 25% of wages in 2019.
“The benefits are far, far more generous than what private-sector workers could get. So, if I were a public-sector employee in New Jersey and they said, ‘You’ve got to pay an extra couple percent of your salary, I would still consider the pensions to be a good deal,” Biggs said.
Switch to a cash-balance plan for new workers. Biggs said they are a mix between traditional pensions and 401(k) accounts, in which investments are credited to a worker’s account.
“Some combination of those approaches – I think it’s not a magic bullet. It’s not going to make this a painless fix. But it gets us closer to bringing these pension plans back to economic reality,” Biggs said.
Michael Symons is State House bureau chief for New Jersey 101.5. Contact him at email@example.com.