Is Your Pension Safe?

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There are two threats to your pension:

1) Market risk. The ability of the NYS Teachers" Retirement System to continue paying benefits depends on the management of the funds collected from school boards and members. Obviously, the downturn in the stock maket over the last 18 months has had an impact on the retirement fund. Click here to read the statement issued by the NYS Teachers' Retirement System.

2) Legal risk. Did you notice the part of the retirement board's statement linked above which said: "Despite market volatility, you can rest assured your retirement fund is safe, secure and guaranteed by the New York State Constitution."? It's important to understand that NY is the ONLY state to provide a constitutional guarantee that your pension, once earned, cannot be reduced.

That constitutional guarantee may disappear, however, if a constitutional convention is held. A convention could eliminate this protection for our pensions, and there are lots of folks out there who want to do just that! Here's a statement from NYSUT:

"Here in New York, the protection of public pensions goes all the way back to 1938, when voters amended the New York State Constitution to guarantee pension benefits. That's why holding a constitutional convention could be so dangerous....
We are the only state in the nation with a constitutional guarantee that one's pension benefits cannot be reduced. If there is a constitutional convention, the constitutional guarantee for all public employees, in-service and retired members, could be removed. If New York legislators truly want to reform certain lawmaking procedures like budget preparation ..., all they have to do is pass individual bills targeting the specific procedures they want to reform."

In addition, there is talk of doing away with our traditional "defined-benefit" pension system, and replacing it with a "defined-contribution" system, such as the 401k's that lost so much of their worth during the stock market downturn. According to NYSUT:

.
"...Advocates argue the changes would give workers more flexibility and control over their pensions, let's not fool ourselves!
Scrapping defined-benefit public pension plans like we have here in New York in favor of defined-contribution plans would be a big mistake. Here's why. Right now, your defined-benefit plan is based on the number of years you teach, final average salary and your age at retirement. Your monthly payment is guaranteed until the day you die. Most plans also offer joint survivor benefits and annual Cost-Of-Living Adjustments to guard against inflation.
However, under a defined contribution plan, you're out of luck if your happen to retire when the stock market goes down. Or if you make the wrong investment choices.
We're the only state with a constitutional guarantee. Article 5, Section 7 of the 1937 state constitution proclaims that our retirement benefits can never be diminished. Therefore, the forces that want to change our public pension system are actually promoting the passage of a bill in both houses calling for a constitutional convention that could repeal that guarantee.
We can't let that happen. Don't be deluded into thinking our benefits cannot be reduced. They can — but proponents have a few more hurdles to jump over here in New York ."

If defined-contribution systems like the 401k are so great, why did TIME Magazine run a cover story in its October 9, 2009 issue titled "Why It's Time to Retire the 401k?" You can read the entire story by clicking here. Here are some interesting quotes from the article:

"The tax-deferred 401(k) plan, and others like it, such as the 403(b) and the IRA, have become our nation's go-to retirement piggy bank. Invented nearly 30 years ago as an executive perk — one more way to dodge Uncle Sam — the 401(k) was never meant to replace the employer-guaranteed pension fund, supplemented by Social Security, as the cornerstone of our nation's retirement system. But propelled by a combination of companies looking to cut costs and consumers who wanted control of their retirement destiny, that's exactly what happened.

The ugly truth, though, is that the 401(k) is a lousy idea, a financial flop, a rotten repository for our retirement reserves. In the past two years, that has become all too clear. From the end of 2007 to the end of March 2009, the average 401(k) balance fell 31%, according to Fidelity. The accounts have rebounded, along with the rest of the market, but that's little help for those who retired — or were forced to — during the recession. In a system in which one year's gains build on the next, the disaster of 2008 will dent retirement savings long after the recession ends.

In what must seem like a cruel joke to many, the accounts proved the most dangerous for those closest to retirement. During the market downturn, the 401(k)s of 55-to-65-year-olds lost a quarter more than those of their 35-to-45-year-old colleagues. That's because in your early years, your 401(k)'s growth is driven mostly by contributions. You control your own destiny. But the longer you hold a 401(k), the more market-exposed it becomes. It's a twist that breaks the most basic rule of financial planning."

"The average 401(k) has a balance of $45,519. That's not retirement. That's two years of college. Even worse, 46% of all 401(k) accounts have less than $10,000. Today, just 21% of all U.S. workers are covered by traditional pensions, and the number shrinks every year. "The time may have come to consider returning 401(k) plans to their original position as a third tier of retirement planning, behind pensions and Social Security," says Alicia Munnell, who heads the Center for Retirement Research at Boston College. "They should not be the thing we rely on for retirement security." And the government seems to agree. This summer, the Government Accountability Office concluded, "If no action is taken, a considerable number of Americans face the prospect of a reduced standard of living in retirement." That's what is known as an understatement."

"Congress was trying to close a loophole on executive bonuses when it created the 401(k). Most companies intended 401(k)s — which were originally called salary-reduction plans but then renamed for the portion of the tax code that makes them possible — to be a perk for highly paid executives, not a pension replacement. That's because lower-paid employees probably could not afford to defer a portion of their paychecks. So companies held on to their pension systems even as they added 401(k)s, which by law they had to make available to all employees. When the market took off in the 1980s, the rank and file clamored to get in.

With a 401(k), contributions came out of your pay but were not taxed, and you had control of them. Contributions could be added or suspended. Best of all, when you left your company, your 401(k) traveled with you, removing a penalty for switching jobs that had been built into the pension system. On the corporate end, a change in accounting rules made the growing cost of pensions more apparent to shareholders. Cutting the pension was a guaranteed way to improve the bottom line. The rise of the 401(k) began."

Don't be fooled by those who claim there is a "huge jump in teacher pension costs" to local school districts which requires changes in the teacher pension system!

Here are the costs, as a percentage of total salaries, paid by local school districts over the last 30 years. The NYS Teachers' Retirement System refers to this as the "employer contribution rate (ECR)." The rate for the 2009-2010 school year is 6.19%, only about one-quarter of what schools paid in the 1979-1985 era. (How can it be that the ECR is LOWER this year in light of what happened to the stock market? You can get the full story about the ECR by clicking here to go to the NYS Teacher Retirement System website's ECR section.)

1979-1980: 22.49%

1989-1990: 6.87%

1999-2000: 1.43%

1980-1981: 23.49%

1990-1991: 6.84%

2000-2001: 0.43%

1981-1982: 23.49%

1991-1992: 6.64%

2001-2002: 0.36%

1982-1983: 23.49%

1992-1993: 8.00%

2002-2003: 0.36%

1983-1984: 22.90%

1993-1994: 8.41%

2003-2004: 2.52%

1984-1985: 22.80%

1994-1995: 7.24%

2004-2005: 5.63%

1985-1986: 21.40%

1995-1996: 6.37%

2005-2006: 7.97%

1986-1987: 18.80%

1996-1997: 3.57%

2006-2007: 8.60%

1987-1988: 16.83%

1997-1998: 1.25%

2007-2008: 8.73%

1988-1989: 14.79%

1998-1999: 1.42%

2008-2009: 7.63%

Private sector retirees enjoy tax benefits, too.

Much is made of the exemption of public employee pensions from state income taxes. The implication is often that private sector pensions are fully taxed. As a recent letter to the Buffalo News pointed out, there are tax benefits for private sector retirees as well.

"Here is a brief summary of the facts. State and local government pensions, as well as all federal and military pensions, are exempt from state income tax. In addition, private sector retirees are entitled to exclude up to $20,000 in pension income, 401(k) withdrawals, traditional IRA distributions, etc. from state income tax. For married retirees filing jointly, each spouse is entitled to the above exemption, so they may be able to exclude up to $40,000. Also, the state does not tax social security benefits."

The next time a private sector retiree suggests teachers, or other public sector retirees give up the tax exemption on their pensions, ask if they are willing to give up theirs as well!