Pearce plan cuts pension shortfall, keeps defined benefits – but it’s not pain-free

By Guy Page

Recommendations proposed by State Treasurer Beth Pearce would, if successfully enacted, reduce the pension fund shortfall and maintain defined benefits, she said in a Jan. 15 report.

However, the retirement payout for current employees would likely be smaller, while the shortfall would be reduced by “only” $2.2 billion. The entire pension fund shortfall is $2.9 billion.

Pearce made the recommendations as the Scott administration waits for the results of a pension fund “stress test” now underway by the Pew Charitable Trust’s Public Sector Retirement Systems Project. Pew’s involvement is looked on with suspicion by the Vermont State Employees Association, who note the think-tank’s bias towards defined contributions but not defined benefits. In other words, employees know how much for retirement is being deducted from their paycheck, but the actual payout would not be guaranteed.

Pearce’s recommendations would:

  1. Maintain a defined benefit system for all current employees and retirees.
  2. Benefit changes would not affect current retirees, only current employees.
  3. Continue employee contributions as set by actuaries.
  4. Reduce cost of living increases for active employees upon retirement, increase employee contributions, and/or increase age/years worked requirements for pension eligibility.
  5. Spend federal pandemic economic recovery funds, if available, on pensions and reducing the pension shortfall.

Pearce doesn’t sugar-coat the pain: “The implementation of these proposals will significantly reduce benefits and increase employee contributions. From a risk sharing perspective, employees are taking on a substantially greater portion of the actuarial losses.”

The decision to accept any of these proposals is up to the state pension investment boards, and to the Legislature.

Read more of Guy Page’s reports. Vermont Daily is sponsored by True North Media.

13 thoughts on “Pearce plan cuts pension shortfall, keeps defined benefits – but it’s not pain-free

  1. Here’s the deal. If a teacher earns $56,000, on average, over a 25 year period, pays 5.5% into their retirement account, the total principle investment equals $75,000. At a 4% annual rate of return, that investment is worth $124,937 after 25 years.

    If the teacher retires and has $124,937 in the bank, still earning 4% annualized interest, the annual interest return is $5000 per year, without spending any principle.

    Now then, “for example, a teacher who works for 25 years with a final average salary of $70,000 would be eligible for an annual pension benefit worth 50 percent of their average final salary.” That’s $35,000 per year.

    Given that the 4% rate of return on the teacher’s investment nets $5000 per year, where does the remaining $30,000 come from?

    Well, the amount of money in a bank account needed to provide an annual $30,000 return at 4% interest is $750,000. And an actuarial model assuming the retiree lives 25 years after retiring at 60 years of age would indicate that paying out the principle, with zero interest, at $30,000 each year would equal the $750,000 in the bank account. After 25 years there would be a zero sum balance …. not counting any interest earned.

    So, at a 4% rate of return on that bank account, as its being reduced over the 25 year period, the account produced $50,000 in interest. In other words, after 25 years of retirement payments equaling $35,000 per year, there should be $50,000 still in each teacher’s bank account, if the plan has been fully funded.

    OK. So, who funds the $750,000 nest egg the teacher didn’t pay? You guessed it. It’s the employer’s contribution. Yes, that’s the State. It’s the taxpayers.

    Using the 4% rate of return assumption, the State has to invest $30,000 each year, for each teacher, to create the $750,000 nest egg required to fund the balance of the teacher’s annual retirement payment. If there are 80,000 students in Vermont with a 10 to 1 student teacher ratio, there are 8000 teachers for whom the State must contribute $30,000 per year – IN ADDITION TO THEIR SALARIES AND BENEFITS. The State’s retirement contribution for teachers alone costs Vermont taxpayers, give or take, $240 Million per year, again – IN ADDITION TO THEIR SALARIES AND BENEFITS.

    And if interest rates are less than 4% year, the liability increases. And this doesn’t count the 8000 or so non-teacher employees in the State’s public school system who have similar, albeit less expensive, retirement plans.

    Now let’s consider government workers not employed in the education system. There are 8000+- people employed in the State government.

    Are you starting to get an idea of what this Ponzi scheme looks like?

  2. There is nothing in here about the level of benefits promised and how they are calculated. Quite often, in public plans, benefits are calculated on the last year´s earnings including overtime, which is not how it´s done in the private sector. This results in a last minute severe blow-up of the pension benefits due. There are examples out there of hundreds of overtime hours worked during the last year of employment. Just think what that will do to pensionable earnings. Ridiculous!

    • Even State employees and teachers don’t fully understand their own retirement benefits. Both the State and the NEA (teacher union) provide counselors to explain the way through the maze of benefit options and costs. From the actual retirement payment, to disability, to deferred compensation, to health and dental care, there are myriad plans and plan options from which to choose. I went through the web site, found the plan comparison charts and forgot to benchmark the IP address. It took me a half an hour to find my way back to the page of interest.

      Check this out. It shows three different retirement options. Group A, for example, receives annual retirement pay equivalent to the highest 3 consecutive years of salary, including unused annual leave, sick leave, and bonus/incentives. Social Security payments, Healthcare and Dental benefits are in addition to the retirement pay.

      • Post Script:
        The point with Teachers and State employee’s benefits are similar. The problem manifests itself in that these employees are in a monopoly. They have no competition. On one hand, the State legislature is free to hire independent contractors to do the State’s work, if State employees become too expensive to support. The same can be said for some of our school districts (about 90 of them that have ‘tuitioning’). But when the VSEA and VTNEA control the monopoly in which they work, that’s when the problems arise.

        Theoretically, our legislature is an independent body representing all citizens. But when the majority of those citizens are employed by a monopoly, that majority controls the legislature too. This is the inherent problem with a Direct Democracy.

        “Democracies have been found incompatible with personal security or the rights of property; and in general been as short in their lives as they have been violent in their death.” James Madison

        “Remember, democracy never lasts long. It soon wastes, exhausts, and murders itself.” John Adams

        Break the monopolies, save the State.

        • Jay,
          Thanks for the continued research. It is as you say quite complex and more than a bit opaque which is why it needs more investigation and explanation for the public who are footing the bill.
          One note: There is some difference between the State retirement system and the Teachers retirement system with the Teachers being the more generous of the two. It is probably because of the more direct involvement with State employees of Governors. They, in general, tend to be more fiscally responsible than the legislature and School Boards who have a larger hand in determining teachers benefit packages.

          • Mr. Freitag, I remind you, you’re the one who wants to get into the weeds here. So, go ahead, make my day. I’ve been there, done that, and got the t-shirt.

            Not only are there differences between Teacher salaries and benefits and State employee salaries and benefits, there are differences between one teacher’s contract and another, as there are differences between one State employee and another. That there are differences between Teacher contracts and State Employee contracts isn’t the issue…except that State employees might be interested to see that they don’t receive anywhere near the proportionate salary and benefits the teachers receive.

            The average teacher earns $56,000 annually plus benefits. The average State employee earns $41,000 annually plus benefits. And the State employee numbers are skewed by the significant number of people who earn $90,000 annually and more. The only people in education who earn that much are Superintendents and some Principles.

            The average teacher, for example, who is paid $56,000 per year, works at least 175 days at 7.5 hours per day (not counting in-service days, sick days, etc.). That’s less than 1400 hours per year. The average State and private sector employees work 40 hrs. per week, 50 weeks per year (2000 hours).

            The minimum number of teacher instructional hours is 27.5 hrs. per week for each student. Further, the student to teacher ratio in Vermont is only 10 to 1, one of the lowest ratios in the country.

            In business, we have a saying; Limits become Extents. If the speed limit is 65, very few people drive 65 or slower. If the minimum workday is 7.5 hours, very few people are going to work 8 or more hours without asking for higher pay. Of course, if you ask the teachers, they work many more hours than that for free. But they don’t have to do so. And, in my experience, as a parent of public-school students and as a former school board director, few do.

            But again, the point isn’t whether or not the system is complicated, or the teachers are members of a union, or that there are differences from one contract to the next. The point is there is NO competition. No basis for comparison. No relativity. It doesn’t matter how fast you think you’re running. If its slower than everyone else around you, it’s slow.

            So, keep Vermont’s GDP in mind. Understandably, on a per capita basis, Vermont has the lowest GDP in the country with the highest percentage of people employed in government, healthcare, education and non-profit institutions. As John Adams opined, under those circumstances “…democracy never lasts long. It soon wastes, exhausts, and murders itself.”

  3. This is the budget elephant in the room. State Treasurer Beth Pearce knows something has to be done on this worsening problem. Even these partial solutions are getting significant pushback for the unions who simply cannot seem to grasp that some sacrifice is going to be needed by their members. Phil Scott, the crafty race car driver he that he is, is letting Pearce, a Democrat, take the lead for now. This gives the best chance in the Democratically controlled legislature for this limited action to succeed. Ultimately though, more will have to be done.

    What would be helpful is an article by Mr. Page or Mr. Roper, both of whom are talented investigators and writers, on what exactly are the retirement and health benefits for teacher and state workers and how they are calculated. People might be surprised how generous these defined benefits are compared to other pensions as well as those who receive no pensions at all. There is room for adjustment for existing retirees as well as those not yet in the system to bring the costs of these programs in line with the money available to sustain them.

    • The problem began 40 years back. Public employees had lower pay, but a guaranteed retirement to balance out the lower wages in their retirement years. Then the union liberals screamed they were all under paid and should have wages equal to people in the private sector, and they got them. that also raised what they received in retirement, but they were not required to pay more themselves. With an economy that is not growing, it left the taxpayers holding the bill.

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