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New Jersey Considers Defined-Contribution Public Employee Pensions

January 17, 2019

Legislators are considering moving new state and local public employees from the Garden State’s underfunded pension systems to defined-contribution plans.

New Jersey legislators are considering moving new state and local public employees out of the Garden State’s underfunded pension systems into defined-contribution plans similar to 401(k) accounts.

New Jersey’s total pension liability is $115 billion, reports the New Jersey Economic & Fiscal Policy Workgroup, a bipartisan blue-ribbon panel of 25 legislators and experts formed to propose solutions to the state’s economic and fiscal problems.

The panel reports the state’s traditional public pensions are only 56 percent funded, meaning the expected return on the investment of previous funds paid into the systems by taxpayers will not cover the projected cost of benefits. By 2030, New Jersey taxpayers will be obligated to pay an additional $7.1 billion into the state’s pension systems, which cover nearly 800,000 current and retired employees.

Shifting workers to defined-contribution plans is one of 30 recommendations for fiscal reforms made by the panel in its 2018 report, “Path to Progress.”

State Senate President Stephen M. Sweeney (D-Gloucester), an originator and leader of the panel, publicly supports action on the recommendations in the 2019 session of the legislature. There is also organized opposition. The New Jersey Education Association, the state’s largest teacher’s union, has labeled the panel’s recommendations “unfair, unreasonable, and unconscionable.”

‘Path to Progress’

The panel proposes moving new workers with less than five years of employment under the current pension system into a plan that structurally resembles the Thrift Savings Plan for federal government workers, which replaced the old defined-benefit pension system in the mid-1980s.

Alternatively, the state could provide a blended or hybrid system, with a defined benefit for the first $40,000 of an employee’s income and an investment account for income above $40,000, the panel suggests.

The panel also recommends raising the full-benefit retirement age for new employees from 65 to the regular Social Security retirement age for their birth year.

‘It’s Only a Start’

The proposed pension reforms would save the state billions of dollars but do not go far enough to solve the fiscal problem, says Scott Andrew Shepard, policy director at the Yankee Institute for Public Policy and author of a recent Mercatus Center report, “New Jersey’s Pension Crisis: Flailing in Deep Waters.”

“Sweeney’s efforts represent a good and honest start in grappling with New Jersey’s pension-funding crisis,” said Shepard. “But it’s only a start.”

The reforms would not touch the pension structure for current workers who have been employed by the state more than five years, putting all the responsibility on new and younger ones, says Shepard.

“Like California, Connecticut, and other states facing these problems, Sweeney makes a proposal that asks everything of younger employees and newer hires,” said Shepard. “Responsibility should be shared among all workers by applying the 401(k)-style programs to all work not yet performed by all current workers.”

The state should also look at the benefit packages of higher-income employees and retirees, some of whom have used loopholes to enhance their benefits, says Shepard.

 “The state should review the size, scope, and provenance of packages for current and future retirees,” Shepard said. “It should think about trimming some of the larger packages if they were achieved by troubling practices such as pension spiking, double dipping, and unconscionably large—and deeply underfunded—initial awards.”

‘No Time to Lose’

Shepard disagrees with other pending proposals to fix New Jersey’s pension problems, including ideas by Gov. Phil Murphy (D), such as imposing a “millionaires’ surtax,” transferring more control over pensions to public-employee unions, and dedicating lottery funds to pension funding. These measures would not fix or even help reduce the pension crisis, Shepard said.

Shepard recommends one more thing: prompt action.

“Further delay in taking the necessary steps to address New Jersey’s pension crisis will only increase the likelihood of more pervasive—and less equitable—cuts later on,” said Shepard. “New Jersey has no time to lose.”

‘Alternate Plan’ Option

Merrill Mathews, a resident scholar with the Institute for Policy Innovation, says several state and local governments have transitioned to defined-contribution plans, which eliminates unexpected public financial obligations and ensures retirees actually receive their money.

“In 1981 and ‘82, three Texas counties—Galveston, Matagorda, and Brazoria—opted out of Social Security and created what’s known as the ‘Alternate Plan,’” said Matthews.

“County workers and the government deposit the same amount as private-sector workers pay in FICA taxes for Social Security, into a private account,” Mathews said. “That money is pooled and loaned to financial institutions that pay interest, with a guaranteed [benefit] floor.”

The private accounts are a reliable source of retirement income for the participants, says Matthews.

“Those accounts have never lost a dime in the 35-plus years of operation, and the counties have no long-term pension obligations,” said Matthews. “Workers retire with roughly twice what they would have received under Social Security.”   

Bonner R. Cohen, Ph.D. (bcohen@nationalcenter.org) is a senior fellow at the National Center for Public Policy Research.

Official Connections

New Jersey Senate Pres. Stephen M. Sweeney (D-Gloucester):

https://www.njleg.state.nj.us/members/BIO.asp?Leg=216

Internet Info

“Path to Progress,” New Jersey Economic & Fiscal Policy Workgroup, August 9, 2018: https://www.heartland.org/publications-resources/publications/new-jersey-report-path-to-progress

Scott Andrew Shepard, “New Jersey’s Pension Crisis: Flailing in Deep Waters,” Working Paper, Mercatus Center at George Mason University, August 1, 2018: https://www.heartland.org/publications-resources/publications/mercatus-working-paper-the-new-jersey-pension-crisis

Author
Bonner R. Cohen is a senior fellow with the National Center for Public Policy Research, a position he has held since 2002.
bcohen@nationalcenter.org

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