School District Pension Plan - Washington State

[joejoejoe1]

Hello Everyone!

My wife recently accepted a job in a Washington state school district where she will be earning a pension. There are two choices she can decide between and we really don't know which one to pick. I'm hoping to start a discussion and see what your thoughts are. I'm currently leaning towards option 2, but let's see what you all think.

Option 2:
-2% of pay for every year work with COL (up to 3% a year) adjustments once you start withdrawing your pension. This will be calculated based on the average of the highest five years of pay. You need to be 55 to withdraw.
-Vested after 5 years of service
-Personal contribution of 7.27% to support pension (she has to contribute this amount to go towards her 2% pension). This predetermined amount can vary over time.
-You are eligible for health insurance under this plan as soon as you leave employment, but you have to take it right away and it cannot be delayed.
-Earliest you can retire is 55 with 20 years of service.
-Reduced benefit at 55 is a reduced benefit prorated monthly or at 65 you will receive your full benefit.

Option 3:
-1% of pay for every year work with COL adjustments (up to 3% a year) once you start withdrawing your contributions (this will start even if you leave before you can start taking a pension but have 20 years of service). This will be calculated based on the average of the highest five years of pay. You need to be 55 to withdraw.
-Vested after 10 years of service
-Personal contribution of 0% to support pension (completely covered by district)
-You are eligible for health insurance under this plan as soon as you leave employment, but can delay benefit.
-Earliest you can retire is 55 with 10 years of service with a reduced benefit or 65 with a full benefit.
-Reduced benefit at 55 is a reduced benefit prorated monthly or at 65 you will receive your full benefit.
Under this plan, you can supplement your pension with a defined contribution of up to 15% of your pay that cannot be changed unless you change employers.] -like a 401k but you can withdraw without penalty once you leave employment

I hope that covers it all, please let me know your thoughts / questions. Thank you!!!

[not_a_trex]

I agree with Ihamo that the government promise of the pension and healthcare is the big gamble here. I would go with option 3 because with that option you can at least take away the money in the defined contribution plan if things don't pan out.

But, I think option 2 has benefits at the extreme ends of the spectrum if the promises of today are fulfilled tomorrow. If she decides to quit after 5 years she is still locked in with a pension AND health insurance. To me, the health insurance (is it free? I'm assuming it's free) part is the big winner here. On the other hand, if she sticks it out for 30+ years, there's potential for the pension to be worth more than the defined contribution plan.

Another thing to consider is what do you want to have happen to your money after you guys pass on? Usually the money gets rolled back into the pension fund. So if you wanted to pass on money to heirs (if you have/will have heirs and plan to have money leftover after you die) then that's another reason to go with option 3.

[joejoejoe1]

Hey Guys,

Thanks so much for the responses!

We are staring out our careers and are both 24 and are recent transplants to Washington (moving from San Diego). I could see ourselves staying here for 5 years, but 10 years would be hard to tell. We are planning on having children closer to our 30's.

Here's some answers:

I think you can take out back your salary contribution from option 2 if you end up leaving before vesting.

The medical part of the deal is not free (you pay the normal district premium as if you were working)

We are not expecting this pension to be a big determinant in our FIRE plans since we are looking at FIRE'ing at 35-40 and the pension won't be worth that much by that time with either plan (just looking to make the best decision with what we have. Most of the benefit here will be by contributing lots to a 457b and some to a 403b

Still on the fence here...but leaning a bit towards 2 because of the faster vesting and ability to take back your contribution if you leave earlier than vesting...Please let me know your thoughts!

[skiersailor]

As a beneficiary of a pension plan, you don't "own" anything.  Instead, you are one of many claimants to a pool of assets that may or not be managed responsibly.  In my opinion, the next big crisis in our economy will be the widespread collapse of defined benefit pension plans.  We are experiencing the longest bull market in US history, and yet many pension plans are already failing.  The next recession or market crash will make it clear exactly how underfunded most pension plans really are.

When a pension plan starts to collapse, some beneficiaries are forced to sacrifice more than others.  Initially, current retirees will be protected at the expense of current employees, but eventually all beneficiaries will start to lose their promised benefits unless taxpayers agree to bail out the pension.  But how likely are taxpayers to have sympathy for pension beneficiaries when their own retirement portfolios have been decimated?

While pension trustees are supposed to disclose the health of a pension, you can't take their pronouncements at face value without questioning whether or not their underlying assumptions are reasonable.  For example, many pensions are currently forecasting 7.5% net annual returns on their investments.  That's much too high for portfolios that are supposed to be conservatively invested.  Pensions will also make mortality assumptions that may or may not be reasonable, and their track records in this area are not good.  They will also forecast future contribution rates which may or may not be reasonable.

Some of the information you would need to objectively evaluate the health of a pension plan can be found in its 5500, but unfortunately not enough information is publicly disclosed to make a confident assessment.  If it were me, I would opt out of any pension contribution no matter how healthy the pension claims to be and instead contribute to a 401(k) or similar defined contribution plan where at least you own your account.

[skiersailor]

It turns out that Washington state has an interesting tool that you can use to evaluate pensions.  I still wouldn't trust it given the concerns I listed above, but it does give some interesting results.

First, I have to laugh at the official statement on this page:
https://www.drs.wa.gov/about/pensions/default.htm
"Washington state has fully funded and underfunded state retirement plans. Current state funding policy requires additional contributions to return the underfunded plans to a fully funded status. As a result of that commitment, it is expected all Washington state retirement plans will have adequate assets to provide for all earned benefits into the future."

Translation: We haven't fully funded all of our retirement plans in the past, but trust us - we will be fully funding them going forward.

Then you can go to their calculator here:
http://fiscal.wa.gov/actuarydata

And if you enter "actuarial value of assets" (adjusted values based upon actuarial assumptions that one hopes are reasonable, but only the actuaries really know) and "statuary rate for funding" (the rate of return that state or federal law allows the pension plans to assume - i.e. 7.5%), only two of the nine pension plans listed are "fully funded" and the rest are underfunded.

But if you select a discount rate (rate of return on assets) of 5%, then only one of them is fully funded and the rest are severely underfunded.

Kudos to Washington state for publishing their actuarial assumptions as well:
http://leg.wa.gov/osa/presentations/Documents/Valuations/17AVR/2017AVR-ActuarialValuationFINAL.PDF

Valuation Interest Rate 7.50%
General Salary Increase 3.50%
Inflation 2.75%
Growth in Membership 0.95%

Note that their current funding status and projections assume an average 7.5% rate of return from supposedly conservative investments, so even assuming aggressive market returns they still can't pay 100% of the commitments that have already been made.  If you change the rate of return assumption to 8.5% (statuary rate + 1%), then most of the plans become fully funded except for PERS Plan 1 (62% funded) and TRS Plan 1 (65% funded).  So the oldest funds in their portfolio are truly hopeless and will never be able to pay their promised benefits in full without a taxpayer bailout.

Would you trust them with a track record like that?  I sure wouldn't.