New Jersey will need to raise taxes by 50% in 10 years when it's totally broke

[tmoneyearlyretiree]

Former municipal bond trader here. I've been doing a lot of research on NJ pensions for my blog bc it occurred to me that the stock market has slumped the past few months, which makes the underfunding on the pension funds in NJ that much worse.

Basically, the current cash burn in the NJ teachers pension fund excluding investment income right now is about 3 billion USD. Their pension fund is about 23 billion, if we apply the infamous 4% rule, they get about 920 million a year in investment income. Benefits are increasing about 4.5% a year. The difference is what they take out of the pension principal.

So here's the rub. 2 billion net drain on the pension each year grows bc the smaller principal generates less investment income. I've run the numbers and they have about 9 years left before the teachers pension has $0. at that point, with benefits increasing at 4.5% a year, they'll have 5 billion USD in payments to make , but $0 from the pension fund to pay for it.

The total NJ budget is about 33 billion. Also, the teachers pension is only one third of the total underfunded pension assets. They'll get less revenue by raising taxes than the straight up increase, so i estimate NJ will need to increase taxes by 50% at that time. The Supreme Court in NJ has already ruled that benefits cannot be cut.

Any NJ residents out there worried about this at all? Has anyone heard anything about this terrible fiscal situation?

[bacchi]

Moody's published a study last fall about this very topic. Christie has an alternate plan but the teachers have to get on it, which requires a vote as I recall. The tax increase would be pretty minimal -- about $180/year for each household.

[Yankuba]

Interesting blog post - commenting to follow

[AM43]

NJ resident here and we already paying thru the nose for school taxes.
I have my primary home and multi family investment property combined paying $20000 in school taxes alone.
Add municipal taxes and everything else $26000.
:( :(

[tmoneyearlyretiree]

As the rating agencies have shown us in the past, they are not immune to being asleep at the wheel. That alternative plan Christie has is just something to get him out of office without having to deal with the enormity of this problem. The math is all there on my site if ppl care to check.

@bacchi No minimal tax increase can fix this problem. They are assuming 7.9% investment return each year, with 30% fixed income. That means their equities have to return about 11.4% a year. That's virtually impossible. If you use a realistic 5.5% investment return, thats how you get them running out in 9 years. Moody's reports dont talk about how ridiculous their assumptions are in the pension plan. There were 86,017 retired teachers as of June 30, 2014 receiving a NJ pension. They cannot be moved off of the pension plan as per the Supreme Court ruling this June. 

Also, there are 8,167 more teachers in NJ over the age of 60 in 2014 compared to 2002 that have earned full pension benefits that will be retiring in the next few years. These folks cannot be moved to any DC style plan. There are 2432 fewer teachers under the age of 30 in NJ in 2014 compared to 2002. The folks they would be moving to the DC style plan haven't earned any benefits yet. That's not the problem. The problem is they're spending billions in current benefit payments to current retirees that they in no small question owe. Eliminating the COLA generosity only slowed benefit growth from double digits to about 4-5% annualized bc of the greater numbers of retired teachers. I read each of the annual pension reports from 2002 to 2014 (thanks to being "early retired" I have the time).

NJ taxes are already sky high as @AM43 pointed out. I question whether or not the state will walk away from their appropriation bonds that they're not required legally to pay. This is a looming disaster whose clock just got sped up by a 10% drop in their pension assets. Also, check out http://www.nj.gov/treasury/doinvest/directorsreports.shtml. They're almost three months late on their monthly investment report. Why?

Also look for their Fiscal 2015 annual pension report (for year ended June 30, 2015). They haven't published one yet. They're expecting it in April. Illinois by comparison already has theirs out. I guarantee Moody's didn't go and look in each individual pension and actuarial reports, I've read their writeups.

[nobodyspecial]

Why don't they just go tax-free ?
Then the only people living in New Jersey will be millionaires flocking from around the world  (and ex-public workers on pensions)
I understand it is called the Garden State so I'm guessing it's something like Monaco, is a marina and a Grand Prix?

[tmoneyearlyretiree]

Why don't they just go tax-free ?
Then the only people living in New Jersey will be millionaires flocking from around the world  (and ex-public workers on pensions)
I understand it is called the Garden State so I'm guessing it's something like Monaco, is a marina and a Grand Prix?

Haha thats a funny point. I wonder how many of those retired NJ tecahers aren't even living in the state, providing benefits back to the state economy. A lot are probably in Florida I'd imagine.

[Sid Hoffman]

Haha thats a funny point. I wonder how many of those retired NJ tecahers aren't even living in the state, providing benefits back to the state economy. A lot are probably in Florida I'd imagine.

My entire family is from New York.  None retired there, all left NY either at retirement or some time before retiring to move south and not deal with snow anymore.  Based on the declining population of New York state, it seems likely this might play a role.

As for government pensions, I think it's criminally unfair to do it the way they do it.  Basically what the government does is say "Hey, all of us only want to put in $ dollars while we work, but we want to collect $$$ dollars after we retire.  This won't work, so let's just make somebody else pay for our retirement?"  That's wrong.  That's not the MMM way at ALL, where you are responsible to pay for your own retirement, not force somebody else to pay for you.

[tmoneyearlyretiree]

Yeah based on what the NJ teachers contribute today (7.5% of pay to pension) , if you assume an employer contribution of 5% of pay to a 401k style plan, then you'd need a 12% annualized return to get what they're getting.

However, since the avg pension is about $44,000, it's not like any of these retirees are rich off their pensions. If they get cut 50% , a lot of people will suffer severely. And the avg teacher has no control over govt policy, so it's not their fault they were promised a series of generous benefits. It's the states fault and by extension the NJ voter.

[mxt0133]

Just look at what happened to Detroit after they came out of bankruptcy.  Basically the same thing will happen, taxes will go up and pensions will be cut.  Nothing to see here, move along.

[beltim]

Most of the problems I had with your post here were addressed in your longer blog post.  However, I have a few lingering issues.

First, although you talk about the contribution rate for teachers, I don't see you discuss the number of dollars they actually contribute to the pension fund.  Did I miss this?  It would be a significant input to the cash flow equation.

Second, you have a few problems when you calculate that the teachers are getting a good deal based on your comparison to a hypothetical 401k.  First, it looks like you only adjust the salary for inflation, not for real increases.  Second, you use a 5% state contribution, which is significantly below typical state contributions for 401k style plans (often ~10%).  Third, and as a partial explanation for the second point, state employees are typically underpaid relative to the private sector, which is often partially ameliorated by better benefits packages (if you work your whole career for one state).  This last point is confused a bit by the fact that the overwhelming majority of teachers are public employees, making a true comparison difficult since public schools make the market.

Third, when you calculate what the imputed withdrawal value of a hypothetical 401k for a teacher would be, you use the 4% rule.  I understand why you did this, as an individual needs the safety net provided by the 4% rule, and the 4% rule protects the retirement income of an individual in >95% of cases.  But when you get a sufficiently large group of people sharing retirement assets, you don't need 95% safety - you only need ~50th percentile (since half of the retirees will die before average, and can subsidize the longevity advantaged).  This significantly increases what a "safe withdrawal rate" looks like.  Alternatively, you could say that in the 401k case, heirs will inherit the entire 401k balance (this is on average true using the 4% rule), while heirs of someone receiving a pension are left nothing unless underaged.

Fourth, you mention several times that courts have already ruled that pensions can't be cut.  Why do you think this would change in the future?  Especially since the state is not meeting its funding requirement, and isn't even coming close.

[beltim]

As for government pensions, I think it's criminally unfair to do it the way they do it.  Basically what the government does is say "Hey, all of us only want to put in $ dollars while we work, but we want to collect $$$ dollars after we retire.  This won't work, so let's just make somebody else pay for our retirement?"  That's wrong.  That's not the MMM way at ALL, where you are responsible to pay for your own retirement, not force somebody else to pay for you.

I assume you find 401k contributions by all employers to be similarly objectionable?  And private pensions as well?  After all, in all those cases you're getting someone else to pay for your retirement just as much as government pensions.

[tmoneyearlyretiree]

Most of the problems I had with your post here were addressed in your longer blog post.  However, I have a few lingering issues.

First, although you talk about the contribution rate for teachers, I don't see you discuss the number of dollars they actually contribute to the pension fund.  Did I miss this?  It would be a significant input to the cash flow equation.

Second, you have a few problems when you calculate that the teachers are getting a good deal based on your comparison to a hypothetical 401k.  First, it looks like you only adjust the salary for inflation, not for real increases.  Second, you use a 5% state contribution, which is significantly below typical state contributions for 401k style plans (often ~10%).  Third, and as a partial explanation for the second point, state employees are typically underpaid relative to the private sector, which is often partially ameliorated by better benefits packages (if you work your whole career for one state).  This last point is confused a bit by the fact that the overwhelming majority of teachers are public employees, making a true comparison difficult since public schools make the market.

Third, when you calculate what the imputed withdrawal value of a hypothetical 401k for a teacher would be, you use the 4% rule.  I understand why you did this, as an individual needs the safety net provided by the 4% rule, and the 4% rule protects the retirement income of an individual in >95% of cases.  But when you get a sufficiently large group of people sharing retirement assets, you don't need 95% safety - you only need ~50th percentile (since half of the retirees will die before average, and can subsidize the longevity advantaged).  This significantly increases what a "safe withdrawal rate" looks like.  Alternatively, you could say that in the 401k case, heirs will inherit the entire 401k balance (this is on average true using the 4% rule), while heirs of someone receiving a pension are left nothing unless underaged.

Fourth, you mention several times that courts have already ruled that pensions can't be cut.  Why do you think this would change in the future?  Especially since the state is not meeting its funding requirement, and isn't even coming close.

1. The teacher contribution would be if it wasn't already included. However it's already included in the ~$1.1 billion contribution number in 2014. $716 million came from teacher contributions about about $420 million came from the state. That's the why the problem is so bad. The pension reform law in 2011 used the increased teacher contributions to offset state contributions instead of shore up the fund like it was supposed to.

2. That's true that the employer contribution in a 401k style plan would probably be higher than 5%. If you took the current employer contribution to the pension, it would be roughly a 4% of pay contribution ($420 million on slightly more than $10 billion of active teacher payroll). To even implement an attractive 401k plan, the state would need to come up with billions in extra revenue.

3. Good point on the 4% rule. However the 4% rule was calculated during a period with much higher interest rates, thus providing a better return for a balanced portfolio of stocks and bonds. With 10 year treasuries at 2%, I think the 4% rule is still reasonable but not overly conservative.

4. The NJ Supreme Court has implied through its ruling in Burgos v. State of New Jersey that the benefits earned by public workers are a contractual obligation. They might not be entitled to things like cost of living increases, but the original baseline of what they're owed seems like it must remain intact. If they could make a cut, it would be need to be so large that lawsuits would be certain to tie it up until a clear decision was made.

[tmoneyearlyretiree]

Just look at what happened to Detroit after they came out of bankruptcy.  Basically the same thing will happen, taxes will go up and pensions will be cut.  Nothing to see here, move along.

The market is not expecting this. New Jersey bonds are trading above 100 cents on the dollar, and large NJ mutual funds are still solvent and not imposing withdrawal restrictions. That's why its news.

[beltim]

Most of the problems I had with your post here were addressed in your longer blog post.  However, I have a few lingering issues.

First, although you talk about the contribution rate for teachers, I don't see you discuss the number of dollars they actually contribute to the pension fund.  Did I miss this?  It would be a significant input to the cash flow equation.

Second, you have a few problems when you calculate that the teachers are getting a good deal based on your comparison to a hypothetical 401k.  First, it looks like you only adjust the salary for inflation, not for real increases.  Second, you use a 5% state contribution, which is significantly below typical state contributions for 401k style plans (often ~10%).  Third, and as a partial explanation for the second point, state employees are typically underpaid relative to the private sector, which is often partially ameliorated by better benefits packages (if you work your whole career for one state).  This last point is confused a bit by the fact that the overwhelming majority of teachers are public employees, making a true comparison difficult since public schools make the market.

Third, when you calculate what the imputed withdrawal value of a hypothetical 401k for a teacher would be, you use the 4% rule.  I understand why you did this, as an individual needs the safety net provided by the 4% rule, and the 4% rule protects the retirement income of an individual in >95% of cases.  But when you get a sufficiently large group of people sharing retirement assets, you don't need 95% safety - you only need ~50th percentile (since half of the retirees will die before average, and can subsidize the longevity advantaged).  This significantly increases what a "safe withdrawal rate" looks like.  Alternatively, you could say that in the 401k case, heirs will inherit the entire 401k balance (this is on average true using the 4% rule), while heirs of someone receiving a pension are left nothing unless underaged.

Fourth, you mention several times that courts have already ruled that pensions can't be cut.  Why do you think this would change in the future?  Especially since the state is not meeting its funding requirement, and isn't even coming close.

1. The teacher contribution would be if it wasn't already included. However it's already included in the ~$1.1 billion contribution number in 2014. $716 million came from teacher contributions about about $420 million came from the state. That's the why the problem is so bad. The pension reform law in 2011 used the increased teacher contributions to offset state contributions instead of shore up the fund like it was supposed to.

Ah, okay, I didn't do the math to compare total contributions and the state contribution for 2014.  Thanks.

2. That's true that the employer contribution in a 401k style plan would probably be higher than 5%. If you took the current employer contribution to the pension, it would be roughly a 4% of pay contribution ($420 million on slightly more than $10 billion of active teacher payroll). To even implement an attractive 401k plan, the state would need to come up with billions in extra revenue.

The bolded part is very interesting.  It also shows how much NJ failed in the past if their needed contributions now are, what, 20% of payroll?  A well run pension program should be able to be funded with 4-5% employer contributions (http://www.massbudget.org/report_window.php?loc=Pension_3_11.html) if the employee is chipping in as much or more.

3. Good point on the 4% rule. However the 4% rule was calculated during a period with much higher interest rates, thus providing a better return for a balanced portfolio of stocks and bonds. With 10 year treasuries at 2%, I think the 4% rule is still reasonable but not overly conservative.

That's your opinion, and in my opinion not a very well supported one.  In effect you're saying that the market and interest rate conditions now place us among the 5% most dangerous times to retire in US history.

4. The NJ Supreme Court has implied through its ruling in Burgos v. State of New Jersey that the benefits earned by public workers are a contractual obligation. They might not be entitled to things like cost of living increases, but the original baseline of what they're owed seems like it must remain intact. If they could make a cut, it would be need to be so large that lawsuits would be certain to tie it up until a clear decision was made.

Okay, if you're saying the state might renege on cost of living increases or something like that, I could see that happening.  But the nominal dollar amount of a pension is clearly a contractual obligation as interpreted by the court, and so that won't be going away.

[Matumba]

Posting to follow

[AZDude]

7.5% contribution rate? AZ teachers pay 11.5%, with an equal match from the district or agency. So 23% contribution rate per future retiree. Pays to live in a financially responsible red state sometimes...

Figure average $40K for 30 years, that is ~$1.2M in principle. For roughly $48K per person SWR, assuming no accumulated interest. And people still talk about it being underfunded.

[mxt0133]

Just look at what happened to Detroit after they came out of bankruptcy.  Basically the same thing will happen, taxes will go up and pensions will be cut.  Nothing to see here, move along.

The market is not expecting this. New Jersey bonds are trading above 100 cents on the dollar, and large NJ mutual funds are still solvent and not imposing withdrawal restrictions. That's why its news.

I agree it will be news, I was trying to be funny with my last sentence.  But we all know how this is going to end.

[tmoneyearlyretiree]

7.5% contribution rate? AZ teachers pay 11.5%, with an equal match from the district or agency. So 23% contribution rate per future retiree. Pays to live in a financially responsible red state sometimes...

Figure average $40K for 30 years, that is ~$1.2M in principle. For roughly $48K per person SWR, assuming no accumulated interest. And people still talk about it being underfunded.

Wow really? That's a massive contribution. The comment on the Massachusetts pension was a very intelligent one. NJ contributed $0 to the pension for three years, I think it was 2002, 2003, and 2004. In 2000, they reduced the teacher contribution to 3% of pay from 5% of pay.

[Psychstache]

7.5% contribution rate? AZ teachers pay 11.5%, with an equal match from the district or agency. So 23% contribution rate per future retiree. Pays to live in a financially responsible red state sometimes...

Figure average $40K for 30 years, that is ~$1.2M in principle. For roughly $48K per person SWR, assuming no accumulated interest. And people still talk about it being underfunded.

Wow really? That's a massive contribution. The comment on the Massachusetts pension was a very intelligent one. NJ contributed $0 to the pension for three years, I think it was 2002, 2003, and 2004. In 2000, they reduced the teacher contribution to 3% of pay from 5% of pay.

Man, I thought we were high in Texas (7.2% employee 6.8% state with 0.2-0.3% increase scheduled for the next few years). Our benefit in non-COLA'ed though, so makes payouts a little easier.

[Sid Hoffman]

I assume you find 401k contributions by all employers to be similarly objectionable?  And private pensions as well?  After all, in all those cases you're getting someone else to pay for your retirement just as much as government pensions.

Either you don't know what a 401k is, or you don't know what an employer contribution is.  I'll explain both under the assumption that you don't know anything.

A 401k plan is a defined contribution plan.  This means contributions are defined and paid for in concert with actual employee pay.  You claim somebody else pays for this, but that is false and illegal.  It is illegal for any other individual or company to pay for your 401k.  This is unlike a Roth IRA, where it's legal for any taxpayer to make your Roth IRA contribution, so long as it doesn't exceed your taxable income.  There is no guarantee of what you will get out of a 401k, only that the money going in to the plan has actually been paid into the plan and accounted for every single year.  This is why it's called defined contribution: because the contributions are defined and paid for during each tax year.

Now an employer contribution is very similar.  It's still really you the employee paying for it, but as another employee benefit program that you receive.  Companies like to say that the company is paying for it so they can engender employee loyalty.  So the employer may make a contribution to that account too.  They can do this with each paycheck, quarterly, annually, or whatever schedule they would like, but it has to be paid for during the year the contribution was defined.

The end effect is that when you retire, all of those defined contributions are what you can retire on.  Again, you make a false claim that you're "living off someone else" but a 401k cannot receive ANY additional contributions once you are no longer working.  Nobody else pays in to your 401k once you retire.

Does this help you to understand what these things are which you do not understand or know anything about?

I'll also take a moment to describe a pension.  A pension is a defined benefit plan.  This means the employee may contribute as little as $0 to the plan and the employer may contribute as little as $0 to the plan, although generally there are laws which state the employer is supposed to make contributions to fund the plan by a certain amount every year.  Many cheat and use false projections with regards to life expectancy, actual benefits, investment returns, and so on.  They do this so that the people who are currently paying for the plan can pay less.

So what about retiring?  Because a pension is a defined benefit, once you've qualified for the defined benefit, it's guaranteed to you.  There's even a taxpayer funded organization called the Pension Benefit Guaranty Corporation the absolutely guarantees you get paid.  Again, there's rules and qualifications but the bottom line is that tons of companies and governments set up pensions with a defined benefit, continually underfund, then go bankrupt and pass it off to the PBGC to pay out their benefit.  Effectively saying that somebody else needs to pay for them now.  Pensions are a system of making it possible to NOT pay for your own retirement, then require somebody else to pay for your retirement.

Not every pension does this, but enough of them have done it to cause major problems for all of those who are still working and paying taxes.  Still, the basic model of a government pension in particular is that the current retirees are being paid from the wages of the current workers and taxpayers.  The money goes from those employees and taxpayers into the underfunded pension which then turns around and sends the money out to retirees.  The fund itself is effectively just a pass-through.

[beltim]

I assume you find 401k contributions by all employers to be similarly objectionable?  And private pensions as well?  After all, in all those cases you're getting someone else to pay for your retirement just as much as government pensions.

Either you don't know what a 401k is, or you don't know what an employer contribution is.  I'll explain both under the assumption that you don't know anything.

A 401k plan is a defined contribution plan.  This means contributions are defined and paid for in concert with actual employee pay.  You claim somebody else pays for this, but that is false and illegal.  It is illegal for any other individual or company to pay for your 401k.  This is unlike a Roth IRA, where it's legal for any taxpayer to make your Roth IRA contribution, so long as it doesn't exceed your taxable income.  There is no guarantee of what you will get out of a 401k, only that the money going in to the plan has actually been paid into the plan and accounted for every single year.  This is why it's called defined contribution: because the contributions are defined and paid for during each tax year.

It is unsurprising that someone so offensive is also so factually incorrect.  Have you ever heard of an employer match?  That's when an employer contributes to your 401k, as part of your compensation.

It's exactly analogous to an employer contributing to a pension.

Now an employer contribution is very similar.  It's still really you the employee paying for it, but as another employee benefit program that you receive.  Companies like to say that the company is paying for it so they can engender employee loyalty.  So the employer may make a contribution to that account too.  They can do this with each paycheck, quarterly, annually, or whatever schedule they would like, but it has to be paid for during the year the contribution was defined.

Hey look, this paragraph contradicts your last one!

The end effect is that when you retire, all of those defined contributions are what you can retire on.  Again, you make a false claim that you're "living off someone else" but a 401k cannot receive ANY additional contributions once you are no longer working.  Nobody else pays in to your 401k once you retire.

True.. but irrelevant.

Does this help you to understand what these things are which you do not understand or know anything about?

More offensive words!  I bet you win a lot of arguments this way.

I'll also take a moment to describe a pension.  A pension is a defined benefit plan.  This means the employee may contribute as little as $0 to the plan and the employer may contribute as little as $0 to the plan, although generally there are laws which state the employer is supposed to make contributions to fund the plan by a certain amount every year.  Many cheat and use false projections with regards to life expectancy, actual benefits, investment returns, and so on.  They do this so that the people who are currently paying for the plan can pay less.

So what about retiring?  Because a pension is a defined benefit, once you've qualified for the defined benefit, it's guaranteed to you.  There's even a taxpayer funded organization called the Pension Benefit Guaranty Corporation the absolutely guarantees you get paid.  Again, there's rules and qualifications but the bottom line is that tons of companies and governments set up pensions with a defined benefit, continually underfund, then go bankrupt and pass it off to the PBGC to pay out their benefit.  Effectively saying that somebody else needs to pay for them now.  Pensions are a system of making it possible to NOT pay for your own retirement, then require somebody else to pay for your retirement.

Not every pension does this, but enough of them have done it to cause major problems for all of those who are still working and paying taxes.  Still, the basic model of a government pension in particular is that the current retirees are being paid from the wages of the current workers and taxpayers.  The money goes from those employees and taxpayers into the underfunded pension which then turns around and sends the money out to retirees.  The fund itself is effectively just a pass-through.

You've reasonably described how defined benefit plans work, although you have a few factual errors.  The PBGC does not guarantee any government pensions at any level.  And it only guarantees up to a certain level of benefits (though this level is high enough that it covers most employees).

I'd like to revisit this:

Pensions are a system of making it possible to NOT pay for your own retirement, then require somebody else to pay for your retirement.

If you have the worst possible view of pensions, this is true.  But can you give us some data as to how often this happens?  If not, it appears you're arguing against pensions on some sort of principle.

In contrast, I have already provided a link in this thread that shows a well-run pension program can provide pension benefits at a cost comparable to a 401k.

I understand the frustration that some pension plans have been run poorly, and that this raises the long-term cost to taxpayers because of the failure of elected officials.  But you know what?  Roads and bridges are sometimes designed poorly by elected officials, but that doesn't get the state off the hook for paying the people who actually built the roads or bridges.

[benjordan]

As a NJ resident (although not a home owner.. yet) this definitely scares me. I grew up in NJ so most of my family and friends live here, but with cost of living already so high the outlook is pretty bleak. There just doesn't seem to be any willingness on either side to make something work. Is this really where I want to put down stakes? If I really wanted to stay local I could do what so many of my coworkers have done and move to PA.

[tmoneyearlyretiree]

Pennsylvania actually has a massive pension problem as well. I haven't researched that situation as closely but I used to live there. They have basically 0 reserves for a rainy day in their budget and their pension problem is similarly awful, though with a longer time horizon before the fund fails. The big difference between Jersey and PA is the starting level for taxes. Property and income taxes are way lower in Pennsylvania and thus there's plenty of room to raise revenues to pay for the defined benefits if the political will is there. Since they just elected a liberal Democrat in Tom Wolf I'd expect they would get something done.

[Travis]

This was big news around 2012 for many state governments. A lot of them were looking to get out of the pension business entirely because the current and projected pension liabilities were quickly outrunning the tax base. This is one of the big reasons why the DoD just changed its pension plan to make it more user-funded. It's a problem we seem to have for most state and federal budgets. Benefits and budgets steadily rise, but the system to fund them doesn't keep up. Not only can we figure this out ahead of time with high school math, but we consciously avoid fixing the problem knowing it only gets worse the longer we wait.

[benjordan]

This was big news around 2012 for many state governments. A lot of them were looking to get out of the pension business entirely because the current and projected pension liabilities were quickly outrunning the tax base. This is one of the big reasons why the DoD just changed its pension plan to make it more user-funded. It's a problem we seem to have for most state and federal budgets. Benefits and budgets steadily rise, but the system to fund them doesn't keep up. Not only can we figure this out ahead of time with high school math, but we consciously avoid fixing the problem knowing it only gets worse the longer we wait.

That's the most frustrating part, everyone knows it's an issue but it's unpopular so politicians aren't going to do anything until they HAVE to.

[nobodyspecial]

That's the most frustrating part, everyone knows it's an issue but it's unpopular so politicians aren't going to do anything until they HAVE to.

I'm guessing it's tough to campaign on a platform of; "tough on retired cops,firefighters and teachers" ?

[tmoneyearlyretiree]

For anyone interested, I'm publishing a follow up to this article, called Jersey will have a 10 billion budget hole in 10 years. It's not just the Teachers' pension, its all of them. Basically the public employees, state troopers, judges, local police and fire are all screwed. The teachers just happen to be the worst funded big system. The local police and fire though are the best funded bc they get local govt contributions, which are much better off than the state budgets.

[mxt0133]

Here's a preview of what's going to happen when the shit hits the fan.

http://www.usatoday.com/story/news/nation-now/2016/01/19/new-detroit-teacher-sickout-looms/79042448/

[dude]

I've shared this article before, but it's worth sharing again.  The blame lies solely with the greedy, asshole politicians who neglected to live up to their side of the bargain, and get to walk away scot-free, unharmed -- NOT with the public service employees who lived up to their end of the bargain and expected to realize the benefits of that bargain.  And now, of course, Wall St. smells money and is rushing in to siphon off as much of it as they can, aided, as usual, by the same greedy fuckheads:

http://www.rollingstone.com/politics/news/looting-the-pension-funds-20130926

[JZinCO]

7.5% contribution rate? AZ teachers pay 11.5%, with an equal match from the district or agency. So 23% contribution rate per future retiree. Pays to live in a financially responsible red state sometimes...

Figure average $40K for 30 years, that is ~$1.2M in principle. For roughly $48K per person SWR, assuming no accumulated interest. And people still talk about it being underfunded.

Wow really? That's a massive contribution. The comment on the Massachusetts pension was a very intelligent one. NJ contributed $0 to the pension for three years, I think it was 2002, 2003, and 2004. In 2000, they reduced the teacher contribution to 3% of pay from 5% of pay.

Man, I thought we were high in Texas (7.2% employee 6.8% state with 0.2-0.3% increase scheduled for the next few years). Our benefit in non-COLA'ed though, so makes payouts a little easier.

haha, Here the state kicks in 18% and the employee 8%, though the pension is a sub in for SS and is COLAd. A typical retiree gets about a 75% income replacement for a full 30 yr career. The fund was looking bleak for awhile but recent third-party actuarial reports are showing that the legislated changes have saved the fund.

[BigoteGato]

NJ has the highest effective property tax rates in the country. It has among the highest income tax rates. For a long time 2 of its major industries were telecom and pharma. But after the AT&T breakup much of the technical strength in telecom dissipated or moved elsewhere. And lately cutting edge pharma research is shifting its approach and moving elsewhere (like Boston). A major government facilities, Ft. Monmouth, has closed. The state is now 35thin population growth. Financial industry is still strong but helps mostly northern NJ. It's extremely high COLA. E.g., car insurance is double other states (NJ is #10 in cost). The trend towards moving from suburbs to big cities will not help (not a lot of big cities in the state; Newark is largest at ~250K). There is no exciting up and coming place to live such as Wiliamsburg or downtown Philly. It's still a rich state (#2 in both per capita and household income), but the long term outlook for the state is worrisome.

[coppertop]

As a NJ resident (although not a home owner.. yet) this definitely scares me. I grew up in NJ so most of my family and friends live here, but with cost of living already so high the outlook is pretty bleak. There just doesn't seem to be any willingness on either side to make something work. Is this really where I want to put down stakes? If I really wanted to stay local I could do what so many of my coworkers have done and move to PA.

Jersey Mark, we have a similar government-employee pension debacle brewing here in PA as well. 

[partgypsy]

There is something similar happening in IL, where the teacher's pension is very much underfunded. I think it also had the same thing of the state either no paying into, or paying less into the pension fund than they were supposed to be doing. Short-sighted.

[Apples]

Pennsylvania actually has a massive pension problem as well. I haven't researched that situation as closely but I used to live there. They have basically 0 reserves for a rainy day in their budget and their pension problem is similarly awful, though with a longer time horizon before the fund fails. The big difference between Jersey and PA is the starting level for taxes. Property and income taxes are way lower in Pennsylvania and thus there's plenty of room to raise revenues to pay for the defined benefits if the political will is there. Since they just elected a liberal Democrat in Tom Wolf I'd expect they would get something done.

Hah.  We can't even get a budget.  The governor vetoed an entire budget in June, then the House Republicans spent months complaining about he was being unreasonable, then House and Senate leaders agreed with the Governor on a budget, which the House then didn't pass, then the Governor released funds for schools and non-profits so they finally had the money they are budgeted, and now it's January and we still don't have a budget.  Pension reform keeps getting brought up, but the House Republicans aren't budging.  And Governor Wolf isn't really  making any gains.  So hah that's funny in a sad way. 

[singh02]

Interesting, just read this today forwarded from the finance buff's weekly friday update (highly recommended free subscription )

"Moody’s singled out New Jersey for special mention. The credit analysts compared what a state is adding to the pension pot to the amount it should be adding in order to eventually catch up. Most of the states are chipping in at least 90% of what’s due annually. New Jersey is paying only 19%."
http://www.forbes.com/sites/baldwin/2016/01/16/state-pension-funds-as-broke-as-ever/#749806244900

[JLee]

I assume you find 401k contributions by all employers to be similarly objectionable?  And private pensions as well?  After all, in all those cases you're getting someone else to pay for your retirement just as much as government pensions.

Either you don't know what a 401k is, or you don't know what an employer contribution is.  I'll explain both under the assumption that you don't know anything.

A 401k plan is a defined contribution plan.  This means contributions are defined and paid for in concert with actual employee pay.  You claim somebody else pays for this, but that is false and illegal.  It is illegal for any other individual or company to pay for your 401k.  This is unlike a Roth IRA, where it's legal for any taxpayer to make your Roth IRA contribution, so long as it doesn't exceed your taxable income.  There is no guarantee of what you will get out of a 401k, only that the money going in to the plan has actually been paid into the plan and accounted for every single year.  This is why it's called defined contribution: because the contributions are defined and paid for during each tax year.

It is unsurprising that someone so offensive is also so factually incorrect.  Have you ever heard of an employer match?  That's when an employer contributes to your 401k, as part of your compensation.

It's exactly analogous to an employer contributing to a pension.

Now an employer contribution is very similar.  It's still really you the employee paying for it, but as another employee benefit program that you receive.  Companies like to say that the company is paying for it so they can engender employee loyalty.  So the employer may make a contribution to that account too.  They can do this with each paycheck, quarterly, annually, or whatever schedule they would like, but it has to be paid for during the year the contribution was defined.

Hey look, this paragraph contradicts your last one!

The end effect is that when you retire, all of those defined contributions are what you can retire on.  Again, you make a false claim that you're "living off someone else" but a 401k cannot receive ANY additional contributions once you are no longer working.  Nobody else pays in to your 401k once you retire.

True.. but irrelevant.

Does this help you to understand what these things are which you do not understand or know anything about?

More offensive words!  I bet you win a lot of arguments this way.

I'll also take a moment to describe a pension.  A pension is a defined benefit plan.  This means the employee may contribute as little as $0 to the plan and the employer may contribute as little as $0 to the plan, although generally there are laws which state the employer is supposed to make contributions to fund the plan by a certain amount every year.  Many cheat and use false projections with regards to life expectancy, actual benefits, investment returns, and so on.  They do this so that the people who are currently paying for the plan can pay less.

So what about retiring?  Because a pension is a defined benefit, once you've qualified for the defined benefit, it's guaranteed to you.  There's even a taxpayer funded organization called the Pension Benefit Guaranty Corporation the absolutely guarantees you get paid.  Again, there's rules and qualifications but the bottom line is that tons of companies and governments set up pensions with a defined benefit, continually underfund, then go bankrupt and pass it off to the PBGC to pay out their benefit.  Effectively saying that somebody else needs to pay for them now.  Pensions are a system of making it possible to NOT pay for your own retirement, then require somebody else to pay for your retirement.

Not every pension does this, but enough of them have done it to cause major problems for all of those who are still working and paying taxes.  Still, the basic model of a government pension in particular is that the current retirees are being paid from the wages of the current workers and taxpayers.  The money goes from those employees and taxpayers into the underfunded pension which then turns around and sends the money out to retirees.  The fund itself is effectively just a pass-through.

You've reasonably described how defined benefit plans work, although you have a few factual errors.  The PBGC does not guarantee any government pensions at any level.  And it only guarantees up to a certain level of benefits (though this level is high enough that it covers most employees).

I'd like to revisit this:

Pensions are a system of making it possible to NOT pay for your own retirement, then require somebody else to pay for your retirement.

If you have the worst possible view of pensions, this is true.  But can you give us some data as to how often this happens?  If not, it appears you're arguing against pensions on some sort of principle.

In contrast, I have already provided a link in this thread that shows a well-run pension program can provide pension benefits at a cost comparable to a 401k.

I understand the frustration that some pension plans have been run poorly, and that this raises the long-term cost to taxpayers because of the failure of elected officials.  But you know what?  Roads and bridges are sometimes designed poorly by elected officials, but that doesn't get the state off the hook for paying the people who actually built the roads or bridges.

I think you missed a couple of important words above.

[beltim]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense. 

[JLee]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

[beltim]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

[Magilla]

Which is why my plan is to FIRE and GTFO of this awful state in less than 10 years.

[JLee]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

Pension vs. 401(k)

There are some notable differences between defined benefit pension plans and defined benefit contribution plans such as 401(k) plans. The biggest difference for the employer is the annual funding obligation associated with defined benefit pension plans. The biggest difference for employees is who bears the risk of loss - in the case of pensions, the employer - if the stock market tanks as the employee nears retirement. However, there are some other differences worth noting.

Matching requirements: Employees often forego participation in 401(k) plans because they don’t think they can afford to contribute while employer contributions to 401(k) plans are often limited to matching contributions. In contrast, employees are generally not required to contribute to pension plans.

Portability: Today’s more mobile workforce may see some advantages to 401(k) plans that earlier generations might have discounted. The portability of a 401(k) plan may provide a benefit to those workers who frequently change jobs over their careers. In contrast, a defined benefit pension plan is typically most advantageous to an older worker who has stayed in the same job for many years since the typical pension plan formula provides a maximum benefit based on years of service and the employee’s final salary.

Risks: Defined benefit pension plans hold all assets in a single pooled trust from which benefits are drawn when each employee retires. Employees do not have individual accounts as part of a traditional defined benefit pension plan, and are guaranteed a payout regardless of market performance, though there are some risks as the federal government ensures them to certain limits. In 401(k) plans, employees can control where money is invested, but if the market crashes, so (in all likelihood) does their portfolio.

Disbursement Rules: Unlike defined contribution plans, defined benefit pension plans cannot make in-service or hardship distributions to employees. However, loans may be made to employees if the plan is designed to satisfy certain tax requirements.

Tax Advantages: If a pension plan meets the required qualification standards, then employers receive a federal corporate income tax deduction for contributions made to the plan (subject to certain limits that prevent employers from receiving tax benefits for “overfunding” a pension plan). Employees do not have to report any income until distributions are made, and earnings within the plan are accumulated on a tax-free basis. Comparable tax benefits apply to 401(k) plans, but the tax deductions for pension plans are higher as the annual contribution limits are higher.

Determining Funding Obligations: An employer’s biggest fear related to establishing a defined benefit pension plan typically relates to the funding obligations. The plan’s funding obligations are determined annually based on the plan’s assets versus its obligations to retirees. The plan’s assets depend on both investment performance and the rate at which assets must be expended to fund obligations to retirees. It is crucial to have expert actuarial and investment advice regarding the anticipated funding obligations.

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

[beltim]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

[JLee]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

With a 401k, you are solely funding your retirement with your own funds and funds provided by your employer as part of your direct compensation package. What you put in, plus gains, is what you get out.

With a defined benefit plan, the amount of money you have contributed is not relevant to what you get back out of it.

[beltim]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

With a 401k, you are solely funding your retirement with your own funds and funds provided by your employer as part of your direct compensation package. What you put in, plus gains, is what you get out.

With a defined benefit plan, the amount of money you have contributed is not relevant to what you get back out of it.

This is true. It's also irrelevant as both are wages owed to you as far of your compensation. The fact that one of them is deferred compensation doesn't mean that "someone else is paying for your retirement" any more than it would be if you agreed to defer some compensation for any other reason (while not common, a number of athletes contracts contain deferred compensation sometimes for decades after the player stops playing).

[JLee]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

With a 401k, you are solely funding your retirement with your own funds and funds provided by your employer as part of your direct compensation package. What you put in, plus gains, is what you get out.

With a defined benefit plan, the amount of money you have contributed is not relevant to what you get back out of it.

This is true. It's also irrelevant as both are wages owed to you as far of your compensation. The fact that one of them is deferred compensation doesn't mean that "someone else is paying for your retirement" any more than it would be if you agreed to defer some compensation for any other reason (while not common, a number of athletes contracts contain deferred compensation sometimes for decades after the player stops playing).

So if the funds you contributed yourself are inadequate to fund your retirement, yet you still receive payment, who's paying for it?  Nobody is saying they aren't "owed to the employee" - that was their deal when they were hired - but their own contributions are inadequate to fund their payments. In this case, the state fell short, so the state has to make up for it somehow, so I pay for it with taxes.

[beltim]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

With a 401k, you are solely funding your retirement with your own funds and funds provided by your employer as part of your direct compensation package. What you put in, plus gains, is what you get out.

With a defined benefit plan, the amount of money you have contributed is not relevant to what you get back out of it.

This is true. It's also irrelevant as both are wages owed to you as far of your compensation. The fact that one of them is deferred compensation doesn't mean that "someone else is paying for your retirement" any more than it would be if you agreed to defer some compensation for any other reason (while not common, a number of athletes contracts contain deferred compensation sometimes for decades after the player stops playing).

So if the funds you contributed yourself are inadequate to fund your retirement, yet you still receive payment, who's paying for it?  Nobody is saying they aren't "owed to the employee" - that was their deal when they were hired - but their own contributions are inadequate to fund their payments. In this case, the state fell short, so the state has to make up for it somehow, so I pay for it with taxes.

Maybe this is a semantic difference. All employee compensation is paid by the employer and earned by the employee. So I guess the employer "pays for it" regardless. But it's earned by the employee regardless.

Sid didn't specifically say employees weren't owed their pensions - but he did say that the way they were funded was criminal. 

[JLee]

I think you missed a couple of important words above.

The point is that employer contributions to a retirement plan are a part of your compensation, regardless of whether it's a defined contribution or defined benefit plan.  When Sid implied one of them is "somebody else pay[ing] for our retirement" but not the other, I pointed out that that makes no sense.

It makes perfect sense. Unless you are claiming that pension funds are on an individual basis and only contain funding gathered from the employee and the employer's defined contribution (generally as a percentage of that employee's pay)?

It doesn't make sense to me.  Both employer contributions to defined benefit plans and employer contributions to defined contribution plans are part of compensation.  The only difference is who assumes the risk of investments  returning less than the anticipated amount – and who benefits if the investments return more than the anticipated amount.

When a state like NJ doesn't make required pension payments, it's functionally equivalent to an employer not making the required match as stipulated by employee contracts.  That's a failure of the state, not of defined benefit plans in general.

That's quite the oversimplification.

http://www.gcglaw.com/resources/employment/pension_401k.html

An employer not contributing to a 401k would reduce the balance in an individual's retirement account.  An employer not contributing to a pension fund will reduce the balance in the pension fund, but does not reduce any individual balances - nor does it lower the benefit entitled to employees.

Yes, it's an oversimplification, and yes there are other differences.  But neither is important to the point that both are compensation earned for doing a job – neither is "somebody else paying for our retirement" unless "wages" are "someone else paying for our retirement." And that's what I was pointing out in my posts to Sid.

With a 401k, you are solely funding your retirement with your own funds and funds provided by your employer as part of your direct compensation package. What you put in, plus gains, is what you get out.

With a defined benefit plan, the amount of money you have contributed is not relevant to what you get back out of it.

This is true. It's also irrelevant as both are wages owed to you as far of your compensation. The fact that one of them is deferred compensation doesn't mean that "someone else is paying for your retirement" any more than it would be if you agreed to defer some compensation for any other reason (while not common, a number of athletes contracts contain deferred compensation sometimes for decades after the player stops playing).

So if the funds you contributed yourself are inadequate to fund your retirement, yet you still receive payment, who's paying for it?  Nobody is saying they aren't "owed to the employee" - that was their deal when they were hired - but their own contributions are inadequate to fund their payments. In this case, the state fell short, so the state has to make up for it somehow, so I pay for it with taxes.

Maybe this is a semantic difference. All employee compensation is paid by the employer and earned by the employee. So I guess the employer "pays for it" regardless. But it's earned by the employee regardless.

Sid didn't specifically say employees weren't owed their pensions - but he did say that the way they were funded was criminal.

That may be the case.  My interpretation, for what it's worth: it's earned by the employee, but due to mismanagement of the pension system, the employee (and employer contributions at the time) were inadequate to pay for what was earned...so the money has to come from somewhere. In this case, being a government entity, it comes out of taxes -- so instead of adjusting the compensation package at the time to reflect future need, they will end up leaning on taxpayers to fund retirements. Ergo, someone else is paying for their retirement (because they did not contribute enough to cover what they will be paid).

[beltim]

That may be the case.  My interpretation, for what it's worth: it's earned by the employee, but due to mismanagement of the pension system, the employee (and employer contributions at the time) were inadequate to pay for what was earned...so the money has to come from somewhere. In this case, being a government entity, it comes out of taxes -- so instead of adjusting the compensation package at the time to reflect future need, they will end up leaning on taxpayers to fund retirements. Ergo, someone else is paying for their retirement (because they did not contribute enough to cover what they will be paid).

Ah, here's the thing.  The employee negotiates a contract, and receives certain compensation.  It is not the employee's fault if the employer fails to optimally allocate employer contributions.  The employee literally has no power to change that.  Furthermore, the plan agreed to by the union would have been sufficient if the employer has contributed its contractually obligated share.

Now, by now contributing the employer's contractually obligated share, the state was able to either have increased services or lower taxes than it would have had it contributed its share.  Yes, the current trajectory suggests that NJ will have to raise taxes (or cut spending) to fund its pensions.  But this is only because the state gave more services, or had lower taxes, in the past – in this case, for at least the last 15 years.

Putting one iota of the blame for the pensions crisis on the employees is ludicrous.  It is entirely due to the state failing to make required contributions.

[nobodyspecial]

The employee negotiates a contract, and receives certain compensation.  It is not the employee's fault if the employer fails to optimally allocate employer contributions.  The employee literally has no power to change that.  Furthermore, the plan agreed to by the union would have been sufficient if the employer has contributed its contractually obligated share.

Except neither is really negotiating in a free market.
The state has to employ teachers, it can't decide to get out of the school business if wages are too high.
They also know that while wages have to be paid now, pension obligations can be booted down the road until another lot are elected.
Meanwhile they can spend the money on things that will get them elected now.