State Employees Not Funding Own Retirement

Source: VRS Report to JLARC

State and local employees, like many of their peers in the private sector, are declining in droves to contribute to their own retirement plans, despite the availability of matching funds, a.k.a. free money which compounds for decades.

The Virginia Retirement System has been putting new hires into a hybrid retirement plan that combines a defined benefit with a defined contribution plan which depends on employee contributions. More than 85,000 active workers are now part of the hybrid plan, but only 18 percent of those are socking away the maximum 4 percent of their pay, which is matched with another 2.5 percent by the state.

Of the rest, 42 percent are contributing nothing, and 36 percent are contributing  only one-half of one percent, or $50 per $10,000.  Most of those are apparently doing so because the state automatically escalated all contribution rates by one-half of one percent on January 1, 2017 and employees had to then intentionally opt out.

The information was part of the annual report on VRS to the Joint Legislative Audit and Review Commission Monday, covering all aspects of an operation vital to 700,000 participants or beneficiaries.  JLARC was presented with a brief oversight, a longer and more detailed overview, and the report of an outside actuary.

Since that first “automatic escalation” the participation has been dropping and it may continue to drop until a second auto-escalation is planned for 2020.  “Current low rates of voluntary contribution by hybrid plan members will result in lower retirement income,” the presentation slide states.   That’s a major understatement, but the hybrid plan and the low participation are saving the taxpayers a bundle in the short run and will save even more as the previous defined benefits plans fade away.

As of March 1, the overall year to date return was 9.9 percent, slightly behind the goal of 10.0.  No figure was given for the end of the fiscal year on June 30 and the last 90 days have been a trade fear-induced roller coaster.  The long-term return baked into VRS funding assumptions is 7 percent.  The five-year average has been 8.1 percent and the 25-year average 8.2, but as the saying goes, past results are not a guarantee.

The charts tracking the funding status of the various individual retirement plans were all inching up and the average overall is now about 77 percent.  Under current assumptions it will take 26 more years to get back to 100 percent funded, where the state was as recently as 2002.  The key phrase there is “current assumptions.”

“VRS is actuarially sound” concluded Lance Weiss of Gabriel, Roeder, Smith and Co. (GRS), the outside auditor.  He praised Virginia for setting that 7 percent target return a few years back, but then reported it is no longer a conservative assumption but merely a reasonable one.  Many of their clients are moving to 6.75 percent, he said.  A figure below 6.5 percent was hinted at.  With an aging workforce looking at starting benefits in the short term, there is even more reason for Virginia to rethink that 7 percent assumption on return.

The assumption on return is what drives the size of employer contributions.  In another report it was noted that if the two largest funds, those for teachers and for general state employees, moved to a 6.75 percent “discount rate” the state would need to increase its annual contribution by $182 million.  Changing that assumption also drives up the unfunded liability on both funds and pushes the 100 percent funded goal further out.

The reports today were merely accepted, with few hard (or easy) questions. It may take a longer period of market uneasiness to undermine the current return assumptions, but House Appropriations Chairman S. Chris Jones told reporters after the meeting he would consider it.

Senate Finance Co-Chair Thomas Norment did ask out loud if the hybrid plan was “worth keeping” but the question received no response.  The defined benefit plan is gone and unless participation patterns change future VRS retirees (86 percent of whom remain in Virginia) will not have the same comfortable income as current retirees.

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8 responses to “State Employees Not Funding Own Retirement

  1. When you are paid 27% below the industry outside, you can’t afford to contribute. That’s a huge part of the problem. The other is that once you are hired, they take funds and say ‘we need to pay new people’ so that the older ones will leave or not stay. Their pay gets lowered to where new people are making more. So why bother staying in?

    • You make a fair point. In the private sector (in the technology industry, at least) companies go to great lengths to describe the value of their total compensation package. For an executive that could include base salary, expected bonus, stock options and awards, health and dental benefits, etc. My guess is that a Python programmer working for Hewlett – Packard has a significantly higher total compensation that a Python programmer working for the Virginia Department of Transportation.

      In the past job security and the knowledge that a defined benefits pension could be achieved was sufficient to keep talented people in public sector jobs despite being able to earn a higher total compensation elsewhere. Once you take away that defined benefits pension you have to add back some more to the employee’s total compensation – partly to retain talented employees and partly to allow the employee to make the voluntary contributions. I am not sure that this is happening.

  2. Wow, 42% contributing nothing? That’s pathetic. Surely these people know that the Social Security trust fund will run out in 16 years. How do they think they’re going to live? Perhaps they don’t even think that far.

  3. Jim, they don’t think that far. And who wouldn’t want to instantly realize a 50% return on their investment plus the future compounded appreciation?

    You have to wonder how many of those employees drive expensive SUVs/pickups and have expensive cellular tastes, to name a couple of areas in which many people are profligate.

  4. My level of ignorance about personal finance in my early working years is now galling to me, as I know what opportunities I missed in the 70s and 80s. Just 25 bucks per paycheck during my first ten years out of school, parked in a couple of good funds, and I’d be writing this from San Tropez…..You just assume there is all the time in the world, that something will work out. Then there is the basic fear of the markets, something that infected my father due to his living through the depression. All the rules have changed but people are now free to be very, very stupid.

    • Yep, I made the same mistakes early on. Pretty sad for a guy who has degrees in both accounting and finance. But I wised up early enough to avoid disaster. That, and being a partner in a company that went public helped restore the San Tropez thoughts *wink* *wink*.

  5. There is hope. I, like many others, made some dumb financial decisions when I was younger but changed them reasonably soon. My daughter immediately signed up for her 401k as soon as she was eligible. My son – well we are still working on him but he is still going to school.

  6. I definitely took advantage of my 401K to build up a retirement fund, and I mostly only put in the minimum needed to capture the company match and tax deduction. My only regret was I missed contributing the first year we had the 401k option, which was back in 1980 or so.

    But it was “easier” in the old days. I recall we had a fixed income (T-bond based) fund paying 15% for like 7 years. I was upset that I only nibbled at that fund, but I went all-in the next year at 13%. Then we had high inflation, so it was more obvious that saving was needed to capture the time value of money.

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