New Jersey has a pension problem.
It’s been a subject of debate for years. The state’s contribution to the pension system seems to increase every year, and the unfunded liability is a mind-boggling amount.
So I wouldn’t blame you if you thought that the system was unaffordable. After all, how can New Jersey continue to plow billions of dollars into this system each year?
But here’s the thing. It’s all a simple bait and switch.
All the politicians who are harping on how we need to reform the pension system focus on two things — the unfunded liability and the state’s annual pension payments.
When you hear that the governor is proposing to appropriate $3.8 billion for pensions, you get sticker shock. But this number doesn’t represent the actual cost of the pension system. It represents the cost of the state paying down its debt, incurred by years of underfunding.
If the state had simply made its normal contribution each year, we wouldn’t be in this mess. As it turns out, that normal contribution isn’t a whole lot. If you look under the hood at the last actuarial report for the TPAF — the Teachers’ Pension and Annuity Fund — you’ll see that it covers about 141,000 active members with a total payroll of $10.6 billion. To cover the ongoing costs of these members’ accrued pension obligations — what’s known as the Normal Cost — the state owes less than $400 million.
This is less than 4 percent of salary. That number doesn’t elicit sticker shock. It sounds reasonable.
In December 2017, New Jersey Policy Perspective released a brief on pensions thatwith those in other states, and it found that the Normal Cost of TPAF was average — 35th out of the 69 pension systems they compared it to. Meanwhile, New Jersey’s other main pension fund, the Public Employees’ Retirement System (PERS), was even cheaper. Its Normal Cost is equivalent to 2.4 percent of salary, the 13th lowest rate of these 69 pension systems.
The answer to our problem is not to further reform the pension system. Public employees have already seen their contributions increase to 7.5 percent of their salary. Meanwhile, the headline of NJPP’s brief was, “New Jersey Public Pensions Rank Among Least Generous in the Nation,” so it’s not like there’s any room left to cut benefits.
The answer to our problem is also not to shift new employees to a 401k-style plan. This doesn’t eliminate the state’s unfunded liability — the real cost driver of New Jersey’s pension problem. And in the long term, it doesn’t save the state any significant amount of money. New Jersey is already committed to contributing 3 percent of an employee’s salary if they participate in the state’s Defined Contribution Retirement Program (DCRP), and that’s not altogether different from the Normal Cost of the pension system. The only thing this would accomplish is shifting risk from the state — which has the capacity to tolerate risk — to individual people who could be devastated if they happen to approach retirement age during a downturn in the stock market.
If we value the middle class and we want to ensure retirement security for New Jersey’s public employees, then the answer is simple.
The state must be serious about paying the debt that it owes. In the long term, once that debt has been repaid and the pension funds are fully funded, the state’s pension payments will drop precipitously.
Luckily, we have a governor who takes that responsibility seriously, and Gov. Phil Murphy’s proposed budget would continue to move the state toward making a full payment to its unfunded pension liability.
This might require some tough choices, like levying a tax on income over $1 million or re-evaluating how the state doles out tax incentives. But one thing is certain. New Jersey’s public employees have been bled dry, and we have nothing left to give.