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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: of 75335  
Subject: Pensions Date: 3/14/2011 4:59 PM
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Hi everyone,

I've recently accepted my first tenure-track position at a university in the Wisconsin system. All of the craziness in the state aside, I'm pretty excited. I was a little surprised, however, to learn that all state employees are required to participate in the Wisconsin Retirement System, which is a pension system and not a defined-contribution plan. I'm pretty unfamiliar with pensions, and thus my probably naive post.

Some random thoughts: pension contributions are taxable, which surprised me. But then again distributions are not taxed at the end. Another feature that is really unfortunate is that if you separate from state employee -- at any time -- you are only entitled to roll over your personal contributions of 5.8%. Whereas I get to keep both my and my employer's contributions from my current position. I suppose it's a way to try and keep public employees working for the state, but it's a little worrisome in a field where people move around quite a bit during the course of their careers. You can keep all of the money in the system, though, and still draw a pension when you retire.

I just ran some quick numbers, and basically this pension will result in potentially $100,000 less for retirement, forecasting 20 years of life after retiring at 66. Kind of crazy, at least to me. The pension system gives a percentage of the salary from your last three years of service, for the life of the annuitant. I used my starting salary (certain to go up, hopefully, sometime in the next 35 years), and was pretty surprised to see that investing the same amount of money with moderate returns of 5% per year would yield over $100,000 more. That's quite a difference! Of course there's the risk that one wouldn't achieve 5% per year. Anyway, I plan on also contributing to an optional 403 (b) as well and certainly won't be planning on relying solely on the pension.

I don't have any questions, necessarily, but wonder what other opinions are on pensions vs. defined-benefit plans. Based on my small study this afternoon, I'm a bit wary of the former and more comfortable with the latter. I knew pensions were a dying breed, and so I've been thrown off a bit with my forthcoming system as I won't be able to forecast very well how my investments are doing, since everything is simply based on a formula. It makes me uncomfortable (even though I'm sure there are proponents who can set my mind at ease)!

-Narn Ceredir
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Author: Fuskie Big funky green star, 20000 posts Top Favorite Fools Old School Fool Ticker Guide SC1 Red Winner of the 2010 Rule Breakers Challenge Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68639 of 75335
Subject: Re: Pensions Date: 3/14/2011 5:04 PM
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I like defined contribution plans better because there is usually a fixed period of time before you become vested in any employer matching contributions, in some cases in the current year. You never hear about the state or a company underfunding a defined contribution plan.

Fuskie
Who notes it is not pensions per say that are bad but how companies and governments mismanage them that fall short...

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Author: ResNullius Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68640 of 75335
Subject: Re: Pensions Date: 3/14/2011 5:09 PM
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My son is in the process of completing his PhD at a fancy Ivy school up north, and he wants to find a tenure-track spot somewhere, with hopes of actually getting tenure. He knows that times are changing, but he's doing what he really likes, so I can't complain. From where I stand, I think the prospect of a solid pension is one of the great features of tenure. Yes, maybe you could make more over time by investing it yourself, but the fact is that you probably wouldn't. Don't look a gift horse in the mouth, but it's still good that you've taken the time to think this through. Good luck.

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Author: Watty56 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68641 of 75335
Subject: Re: Pensions Date: 3/14/2011 5:30 PM
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One of the big pitfalls in traditional pensions is that the way the mathematics works out is that a lot of the effective "cash value" of the pension accrues in your late 50's or 60's .

It sounds like you are projecting your pension after 35 years of employment. If you leave the job 12 years early after 23 years then you might think that your pension would be around two-thirds of what you are expecting but this is not how it works, you would get a LOT less because of the way the accruals work.

Companies with traditional pension plans are at times notorious about laying off older workers because they save so much on the pension costs that accrue the last few years an employee works before retirment.

Greg

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Author: akck Big red star, 1000 posts Old School Fool CAPS All Star Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68642 of 75335
Subject: Re: Pensions Date: 3/15/2011 12:29 PM
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I'm not certain, but you may not have taken into account the tax-free nature of the pension. Some pensions offer retirement medical benefits and offer inflation adjustments. I was Lucky to have fallen into a system with pension and medical benefits. The medical benefits will allow me to retire at the system's normal retirement age. The partially inflation proofed pension will help too. Be aware that many systems have a vesting period before you qualify for benefits and it is worth that extra year to ensure you are vested.

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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68643 of 75335
Subject: Re: Pensions Date: 3/15/2011 1:48 PM
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"I used my starting salary (certain to go up, hopefully, sometime in the next 35 years)"

Don't count on it. Here in Florida, we have not had a wage increase of ANY KIND in 6 years...and counting. Every day I work, I make less thanks to inflation. But, like most of the unemployed, even the employed have limited options to change jobs. To make things worse, we have a Governor who is castigating employees of our fine state as a bunch of money grubbing parasites. He continues to harp on how we should all pay 5% of our own salary into the pension system because "that's how the private sector does it". Did I mention we've had no salary increases for 6 years and prior to that, the increases were less than 2% - well below inflation. Well, an exception is the teachers and the cops, who are well unionized. They usually get theirs and the rest of us got the scraps. He's also targeting to have us pay annual increases in healthcare premiums approaching an additional $10,000 for family coverage. When 75% of our employees earn less than $40,000/year, you can see the cause for alarm. What Rick Scott conveniently leaves out is that the employees of the State of Florida are the WORST PAID employees in the entire country. But, he's not letting the truth get in the way of a good story, is he?

Someone else said that the bulk of your pension's value is gained in the back half of your career. My advice is, if Wisconsin offers the 401(k) style plan in the near future, and it's highly likely, jump on it. It will be forever yours, completely portable, and politics will never affect your retirement. Also, if you are married, jump onto your spouse's medical insurance.

These two simple things will help you sleep at night so you don't have to worry who will get what based on union or no union, age, salary level, experience level, whatever. Give 'em the finger...

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68644 of 75335
Subject: Re: Pensions Date: 3/16/2011 9:50 AM
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Did I mention we've had no salary increases for 6 years and prior to that, the increases were less than 2% - well below inflation.

Let's see, I've had a NEGATIVE 25% salary change in the past 15 years. Not working any less, actually working harder.

He continues to harp on how we should all pay 5% of our own salary into the pension system because "that's how the private sector does it".

How about having to contribute 100% into your own retirement like myself? I don't have a match from anyone.

How about paying 100% of your own medical insurance?

What Rick Scott conveniently leaves out is that the employees of the State of Florida are the WORST PAID employees in the entire country.

Are you a slave or indenture servant? Then leave.

Everyone has problems.

JLC

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Author: ferjen Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68645 of 75335
Subject: Re: Pensions Date: 3/16/2011 10:34 AM
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Are you a slave or indenture servant? Then leave.

Perhaps you missed the part where I basically said I would if I could...but the job market in Florida is especially bad with unemployment hovering around 12%. So, the employed are competing with the unemployed for the scant few jobs available. Try not to be such a dick next time...

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68646 of 75335
Subject: Re: Pensions Date: 3/16/2011 10:47 AM
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Try not to be such a dick next time...

Whoa, such intelligent repartee. Its no wonder you have employment issues.

You could leave if you want to. So quit whining. I'm sure someone without a job would love to have yours.

JLC, who won't flag this blatant inappropriate response like typical thinned skinned hypocritical whiners.

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68647 of 75335
Subject: Re: Pensions Date: 3/16/2011 2:01 PM
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I do not write pension plans for a living, but I understand their basics reasonably well. So let me off you the following...

...I was a little surprised, however, to learn that all state employees are required to participate in the Wisconsin Retirement System...

Yes, Government defined benefit plans may not only require your participation, but require that you contribute to it. This is theoretically possible in private pensions, but extremely rare.

Some random thoughts: pension contributions are taxable, which surprised me. But then again distributions are not taxed at the end

Are you sure about thi? I have NEVER heard of govt employee mandated pension (defined benefit plan) contributions to be after tax. This can happen electively in a defined contribution plan....but I can't imagine why the employer would require non-elective employee contributions to be after tax...and I can't imagine ERISA (dept of Labor) would allow it.

...Another feature that is really unfortunate is that if you separate from state employee -- at any time -- you are only entitled to roll over your personal contributions of 5.8%. ...

Nope...can't be done. ERISA has very strict vesting laws on employer contributions. What you've described was the pre 1974 ERISA cutesie game unscrupulous employers would play on unsuspecting employees, where all plan contributions would not vest until retirement age...and then the employer would fire them the year before this...which as you've described it is what could happen with this pension plan.

What you may mean is that if you leave the employer within a certain time period (up to 5 years under current rules), you would lose all employer contributions. This is a 5 year cliff vest...but your employer could also use a 3 to 7 year graded vesting schedule.

I just ran some quick numbers, and basically this pension will result in potentially $100,000 less for retirement, forecasting 20 years of life after retiring at 66. Kind of crazy, at least to me. The pension system gives a percentage of the salary from your last three years of service, for the life of the annuitant. I used my starting salary (certain to go up, hopefully, sometime in the next 35 years), and was pretty surprised to see that investing the same amount of money with moderate returns of 5% per year would yield over $100,000 more. That's quite a difference!

You sound like you might be a 'numbers' kind of guy, so let me show you how to do this calculation.

You only give part of your plan's formula....which is usually something like the average of the top 3 earning years, times the number of years of service times some percent...usually 1 to 2%. Lets say your current salary is $75,000 and you expect this to grow by an average of 2%/yr, so in 35 years at your plan's retirement age, your final (highest) 3 would be (144,167 + 147,050 + 149,192)/3 = 147,070. So using my made-up formula your future benefit in 35 years at, presumably, your plan's full retirement age of 66 would be
147,070 X 35 X .02 = $102,949

So now the question is how much must be collected into a 'pot' to be able to fund this level pension (I assume its not inflation adjusted) over your retirement years. Assuming your life expectancy at retirement is 25 years (20 - 25 is average) and the average annual rate of investment return is 5.5%, then the 'pot' would have to be $1,456,903.

Now the question is, how much needs to saved over the next 35 years to reach this.

If you grow annual savings rate by an estimated inflation rate of 2%, and you could average an annual investment return of 5.5%, my calculator tells me you'd need to save $11,296 your first year, increasing this each year by 2%, so the second year's savings amount would be $11,522 and so on.

But there is one problem. The way most pensions are funded is by using what's called the 'accrued benefit' method, which is not a level method, but a small amount at the start that gets very large in later working years. This is the main reason that so many pensions are underfunded today. It's because the average years of service in the pensions plans and the average age of the worker is much greater than it was 30 years ago. But what this means is that in the early years, very little is set asided to meet your future pension needs. You've got to wait until your later years. So, for example, if you leave/quit/laid off in, say, 10 years, your accrued benefit, using my above numbers, will be $17,926 year....but you'd have to wait about 25 years to get it, which, at an average annual estimated inflation rate of 3%, would only be worth, in today's buying power, about $8,562 and if the plan offers a 'cash-out' option, which will represent the present value of the future capital required to fund your accrued (in this case $17,926 annual) benefit, this cash value would only be about $66,524, a number you could reach with personal savings, growing at 2% per year, by saving 3,536 the first year. This is one of the primary reasons DBPs are not very popular with the young.

BruceM

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Author: reallyalldone Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68648 of 75335
Subject: Re: Pensions Date: 3/16/2011 3:38 PM
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FYI

http://www.uwsa.edu/hr/benefits/retsav/wrs.htm

It's considered a hybrid system (yes the link is to UW but it's the same state system)

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Author: intercst Big funky green star, 20000 posts Top Favorite Fools Top Recommended Fools Feste Award Nominee! Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68649 of 75335
Subject: Re: Pensions Date: 3/16/2011 3:58 PM
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JLC complains,

<<op: Did I mention we've had no salary increases for 6 years and prior to that, the increases were less than 2% - well below inflation.>>

Let's see, I've had a NEGATIVE 25% salary change in the past 15 years. Not working any less, actually working harder.

</snip>


Like many high-income physicians, perhaps you were overpaid and are now at market-level compensation?

intercst

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68650 of 75335
Subject: Re: Pensions Date: 3/16/2011 4:12 PM
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>> ...perhaps you were overpaid and are now at market-level compensation? <<

Sincerely yours,

Governor Scott Walker

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Author: NarnCeredir One star, 50 posts Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68652 of 75335
Subject: Re: Pensions Date: 3/16/2011 7:16 PM
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Are you sure about this? I have NEVER heard of govt employee mandated pension (defined benefit plan) contributions to be after tax. This can happen electively in a defined contribution plan....but I can't imagine why the employer would require non-elective employee contributions to be after tax...and I can't imagine ERISA (dept of Labor) would allow it.

Absolutely sure. But the benefits are not taxed when they're paid upon retirement (so I suppose the closest comparison for tax purposes is a traditional IRA vs. a Roth IRA). And, of course, the employer contribution is made on a pre-tax basis. How about that! But the only reason I don't like this system is that my student loan repayment is based on my adjusted gross income, and post-tax pension contributions won't help reduce that at all. See question 8 below:

http://etf.wi.gov/news/Budget_Repair_Bill_Whats_New.pdf

Nope...can't be done. ERISA has very strict vesting laws on employer contributions. What you've described was the pre 1974 ERISA cutesie game unscrupulous employers would play on unsuspecting employees, where all plan contributions would not vest until retirement age...and then the employer would fire them the year before this...which as you've described it is what could happen with this pension plan.

What you may mean is that if you leave the employer within a certain time period (up to 5 years under current rules), you would lose all employer contributions. This is a 5 year cliff vest...but your employer could also use a 3 to 7 year graded vesting schedule.


Yes, it absolutely can be (and is) done. Vesting in the WRS is automatic as of your first day of employment, but the only portion that an employee can take with them is their 5.8% contribution. If you do not leave the funds in your WRS account until age 55, the lowest age for retirement benefits, you forfeit the employer contribution. See:

http://etf.wi.gov/members/benefits_separation.htm

-Narn Ceredir

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Author: BruceCM Big red star, 1000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68653 of 75335
Subject: Re: Pensions Date: 3/16/2011 10:44 PM
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I looked through the link you provide and although I have not researched this particular retirement benefit, it sounds like the employer may be offering a supplemental benefit to the qualified plan. SERPs are funded by assets owned by the employer and may be lost if the employy separates before a certain age or for cause. But it cannot be part of the qualified DB plan for reasons I've given.

http://www.dol.gov/ebsa/faqs/faq_compliance_pension.html

BruceM

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Author: JLC Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68656 of 75335
Subject: Re: Pensions Date: 3/17/2011 6:57 AM
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Like many high-income physicians, perhaps you were overpaid and are now at market-level compensation?

Its hard to know what market level is when there is no "free market". Too many 3rd party players involved.

JLC

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Author: RoadScholar5 Big gold star, 5000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68666 of 75335
Subject: Re: Pensions Date: 3/21/2011 11:45 AM
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"Are you a slave or indenture servant? Then leave.

Everyone has problems."

Ah, the ruling class loves this. Get the folks fighting each other instead of looking to where the real problem lies.

America used to be such a great country.


RS

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Author: ziggy29 Big funky green star, 20000 posts Old School Fool Add to my Favorite Fools Ignore this person (you won't see their posts anymore) Number: 68681 of 75335
Subject: Re: Pensions Date: 3/22/2011 9:59 AM
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>> Ah, the ruling class loves this. Get the folks fighting each other instead of looking to where the real problem lies. <<

IMO, that's exactly what it is -- an attempt to divide the middle class and turn half of it against each other. As long as the corporate and economic elite can successfully turn the working class against itself, the less we'll notice as they continue to increase their share of the nation's wealth and they watch us in the trenches fight against each other for the decreasing amount of crumbs they leave for us.

All this partisan media raising ire and polarizing us "ordinary folks" is also playing a large part in this. When we obsess on "blue" versus "red" we again turn on each other while losing vision of the big problem -- the shrinking middle class and the increasing gap between the haves and have-nots.

Having said that, I think it's also important to address the growing gap between the fates of private and public sector workers -- not just to make what the public sector is getting more sustainable, but also to eliminate some of the backlash against public sector raises, pensions and other benefits we stopped getting a long time ago. But that doesn't require fighting each other, IMO.

#29

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