By Mark J. Magyar

Think tanks cite Pennsylvania actuarial study in warning against hidden costs of switch from traditional pension to 401(k) plan

While Republican Gov. Chris Christie says New Jersey needs “to stop the insanity of a defined-benefit pension system that we cannot afford,” liberal policy analysts argue that New Jersey cannot afford the hidden costs of switching to a 401K-style pension plan either.

Launching a preemptive strike while Christie’s pension commission is still reviewing options, New Jersey Policy Perspective teamed with Pennsylvania’s Keystone Research Center to issue their own pension policy paper yesterday. The two think tanks concluded that shifting new employees out of the current defined-benefit pension plan would increase New Jersey’s future pension costs by some $42 billion and result in smaller retirement checks for those switched into defined-contribution plans.

“Most states that have considered switching employees to 401(k)-type accounts have rejected doing so because it risks putting a severe burden on taxpayers,” said Stephen Herzenberg, Keystone’s executive director. He noted that only Michigan, Alaska, and West Virginia have made the switch — and that West Virginia changed back.

Herzenberg said actuaries for Pennsylvania’s two largest pension systems estimated that pulling new employees — and their pension contributions — out of the state’s defined-benefit plan would add $42 billion over 30 years to the cost of pensions for retirees and workers already in the current plan. “When Pennsylvania’s legislature got that eye-popping estimate in May and June of last year, that led Pennsylvania to back away from a switch to a defined-contribution account,” he said.

While New Jersey pension actuaries have not conducted a similar study, Herzenberg and Gordon MacInnes, NJPP’s president, said the $42 billion projection for Pennsylvania is a good back-of-the-envelope estimate for New Jersey because the two state pension systems have approximately the same total assets, unfunded liabilities, funding ratios, benefit levels, and number of retirees.

“The real pension problem in New Jersey is not pension-plan design, but the state’s failure across numerous gubernatorial administrations to make the required contributions,” Herzenberg said. “A lot of states have not made contributions, but New Jersey ranks 50th for share of contributions made compared to the amount that should have been made since 2003” — a period that spans seven fiscal years under Democratic governors and five budgets under Christie.

MacInnes specifically cited Christie’s decision to cut $2.4 billion in pension contributions in the wake of last April’s plunge in income tax revenues, breaking his 2011 promise to ramp up to full actuarially required funding of the state’s massively underfunded pension system by 2018.


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