Gov. Corzine's Proposal on Pension Payment Deferrals

The pension deferral proposal is concerning. It seems more like a gimmick rather than sound fiscal responsibility. It is not truly saving money, it is only deferring payment into the pension system. The responsibility for fully funding the pension still exists. Corzine’s argument is that this will save taxpayers money in the short term. This is true, but it put an even bigger burden on future years.

I have been in the retirement and pension industry for over 20 years and from what I can tell, this proposal violates one of the sound financial principles, dollar cost averaging. Employees in 401(k) and similar plans will put in the deposits to their plans every pay period buying what securities / funds they have selected. Rather than trying to “time” the market, these periodic payments will buy more shares when the market is low and less shares when the market is high. I am not sure of the investment mix of the pension funds, but I am assuming there is a good percentage of an equity investment. While no one knows if we are at the bottom of market now, by not making contributions, we miss an opportunity to get in at a lower cost which would generate more appreciation when the market comes back. Also at this time, funds are being depleted to pay out pensions and a larger percentage of the balance is necessary since the fund value has decreased. So by not buying at a possible low, and losing a larger percentage of assets in withdrawals, we may not get the appreciation in a normal market cycle. This may mean we may need to pay even more than currently anticipated to make up for the deferred payments. This is potentially extremely dangerous. One of the major issues with the US auto industry, now looking for a bailout, is their pension obligations. If New Jersey runs into trouble with pension obligations, who will bail us out? Of course, if the market continues to go down over the next few years, Corzine could be deemed a financial genius. But, I do not think it is the government’s responsibility to time the market.

What is really needed at this time is pension reform to make the system more fundamentally sound to protect the retirement of employees while not costing too much in taxes for the residents. A potential option that should be investigated is converted to some sort of defined contribution plan, similar to a 401(k) (they are called 457’s in governments). Many corporations converted to these types of plans. Rather than guaranteeing a payout and the state managing a pension fund, some type of employee investment program could be set up which would include government contributions, employee contributions with a match. The money would then belong to the employee and they could take it out at retirement. The state would not need to worry about the market uncertainty of managing a pension fund. While it would not be good to take anything away from current employees pension promises, they could be given the option to the new program. There is a lot of work to do to see if this type of program would work including ensuring does provide an adequate retirement for employees but it is an option that could be beneficial to New Jersey’s employees and taxpayers.