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Batinick defends pension proposal

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* Rep. Mark Batinick asked if he could respond to yesterday’s post about his pension proposal…

Rich,

Thanks for covering the recent pension proposals yesterday. The one thing missing in the discussion were reasons the plan would be good for the employee. I thought I’d outline a few:

1. The lump sum can be (and probably should be) rolled into an IRA creating a tax shelter. A large annuity can have a fairly large federal tax hit. Leaving your savings in an IRA allows it to grow tax deferred. Retirees generally don’t have very many tax write-offs. This situation would be especially helpful for dual pensioners who will likely have a large federal tax bill. Also,with an IRA payments can be structured so that you still qualify for the senior property tax freeze.

2. You can’t will a pension, but you can will an IRA. Maybe an employee wants to leave some money to a child, a grandchild, or even an unmarried significant other. You can’t do that with a pension. You can with my plan. I recently was notified of a retiree with a special-needs child who wishes they had this choice. Why shouldn’t we give it to them? Maybe people want to donate to a charity when they pass.

3. Frankly, it gives employees control over their future. I take exception to the idea that the people we trust to educate our children are unable to manage their retirement. They may actually do a better job of it than us.

4. It provides peace of mind. Yes the constitution protects state pensions. However, that is this constitution. It is up for negotiation by the voters every 20 years. Any General Assembly can put it on the ballot during any general election. I’ve been approached by people who just want to cash out so that they can stop being a political football. Can you blame them?

5. My proposal allows you to take a partial pension buyout. You can give up a small portion of your monthly payment in exchange for the lump sum. I believe this would be the most popular option.

I was surprised how many people thought there would not be many takers. When GM offered its accelerated buyout approximately 30% of retirees and 50% of current employees chose the lump sum. One of the advisers working with GM employees stated that while the lump sum wasn’t right for everyone, he recommended it to 40% of his clients. Lastly, nearly 20% of new SURS employees are choosing to manage their own retirement. That is certainly riskier that taking a guaranteed lump sum at the end of your career. If just 20% of the aggregate dollars are paid out as a lump sum at retirement the savings to the state are very significant.

And as mentioned in committee yesterday, there are many ways to expand the idea. For example, a lump sum can be offered to inactives, to buyout employees COLA’s, etc.

posted by Rich Miller
Tuesday, Mar 1, 16 @ 11:09 am

Comments

On a very serious note, since Rep. Batinick refers to teachers in his response, can you ask him to elaborate on how this law and option would change the state’s ability to avoid participating in social security for those teachers?

Comment by Anon Tuesday, Mar 1, 16 @ 11:19 am
To point out the obvious, GM employees are not protected by the state constitution. Since I can’t imagine that this plan once implemented would actually save the State any money, the scheme is made apparent here in the comments that “there are many ways to expand the idea.”

Comment by Anonymous Tuesday, Mar 1, 16 @ 11:23 am
He cites the GM case as if those retirees and workers had a decent choice.

Furthermore, the IRS has started cracking down on these company buyouts as a means for them to get out of there obligations to workers and retirees.

Comment by The Muse Tuesday, Mar 1, 16 @ 11:24 am
===I take exception to the idea that the people we trust to educate our children are unable to manage their retirement.===

Classic “appeal to flattery” argument. You’re too smart to want what is actually best for you.

Comment by veritas Tuesday, Mar 1, 16 @ 11:27 am
I’m sorry Represenative, but could you please frame your response in terms of spies and personality conflicts and also blame someone at the same time? //snarky compliment with applause

Comment by Earnest Tuesday, Mar 1, 16 @ 11:29 am
This is an excellent concept. This requires careful number crunching by an annuitant ( or adviser) but it will be useful to many. Plus it can reduce the State’s liability.

Comment by anon. Tuesday, Mar 1, 16 @ 11:29 am
As Anonymous said, state pensions are constitutionally guaranteed and, for that matter, the pension funds are ineligible for bankruptcy protection, so the state buyout option is not as appetizing an alternative as in the GM situation where there are more potential bad outcomes for saying in the GM pension. That said, Rep. Batinick’s plan looks like an actual option instead of a cram-down, so it likely passes Constitutional muster.

Comment by SAP Tuesday, Mar 1, 16 @ 11:31 am
===anon. - Tuesday, Mar 1, 16 @ 11:29 am:===

You know it’s okay if you’ve come to capitol fax to say something flattering about your boss to go ahead and create a user name. You can even use it once.

Comment by Anon Tuesday, Mar 1, 16 @ 11:32 am
OK - not everyone is going to go for this. As a matter of fact, I don’t know anyone who would. But what if .5% do go for it - would it be worth doing if it gets that level of participation?

Right now a five year IRA is getting 1.51%, the highest possible. Three months are getting .11%. Anyone want a piece of that action?

I take exception to the idea that the people we trust to educate our children are unable to manage their retirement. LOL, please spare us your offense. Educating children does not make one able to manage their retirement savings anymore than having a guitar makes me eligible to date a supermodel.

I’m a bit tired of hearing how you are granting me freedom to get screwed. SAVE YOUR BREATH.

Comment by VanillaMan Tuesday, Mar 1, 16 @ 11:33 am
Rep. Batinick

The constitution is working against your logic, but I appreciate your efforts and if you wanted to discuss, privately, with - RNUG - and the two of you, and many others, could continue to find solutions, I know I’m always open to hear new ideas that work, are constitutional, and can pass the hurdles to reality.

Hope to see you around Oswego,

OW

Comment by Oswego Willy Tuesday, Mar 1, 16 @ 11:34 am
The SURS comparison also isn’t the best, since he’s talking about decisions currently being made by Tier 2 employees versus prospective decisions by soon to be retired Tier 1 employees. I don’t necessarily disagree with his second point, but it does seem that proponents of these types of buyouts are often trying to guilt retirees into leaving something behind for little Johnny so that the employer can save a few bucks.

Comment by Juice Tuesday, Mar 1, 16 @ 11:36 am
” I take exception to the idea that the people we trust to educate our children are unable to manage their retirement. ”

That’s a silly remark. Financial planning for retirement is complicated. So is managing investments after retirement. That’s why, despite my J.D., I have a financial planner. I know my risk tolerance, I know (with her help) what I need to live decently in retirement. But she knows how to get me there. I don’t trust MYSELF when it comes to the markets and investments.

Comment by JoanP Tuesday, Mar 1, 16 @ 11:36 am
Actually GM and the state were about equivalent in terms of financial footing. Is that what he is impling?

Comment by blue dog dem Tuesday, Mar 1, 16 @ 11:43 am
Guessing the participation rate is extremely hard. The GM example isn’t all that comparable since they offered employees 100% of pension’s net present value whereas this plans would offer a person 75% of the pension’s net present value. Seems likes a big difference.

Comment by My button is broke... Tuesday, Mar 1, 16 @ 11:43 am
Sigh.

I didn’t realize there were so many state retirees who wouldn’t need their pensions to live on (hello!) and could roll it over into some other financial instrument and let it sit.

Yes, you can leave your defined comp accounts to your heirs. But you can do something similar now by investing your pension check instead of spending it. And that pension check, undiminished, with cola, is protected by the constitution. Your IRA isn’t. Hello again! Remember the Great Recession?

Comment by Cassandra Tuesday, Mar 1, 16 @ 11:45 am
===I take exception to the idea that the people we trust to educate our children are unable to manage their retirement.===

Rep. Mark Batinick: I take exception to the idea that the people we trust to educate our children are unable to identify a pension theft plan.

Comment by Enviro Tuesday, Mar 1, 16 @ 11:51 am
Why, if my pension is going to be $26,000a year at age 60 and grow over the next 240 months to $52,000 (roughly $780,000 over a lifetime) why would I accept 75% ($585,000) unless I was terminal at retirement age?
IRA withdrawals are taxed by the state. (Make that 72% instead of 75%)

Comment by Union Man Tuesday, Mar 1, 16 @ 11:54 am
Not to completely discount Rep. Batinick’s proposal, because it IS an idea, however much one may not like it.

But given interest rates on IRA contributions, the 25% discounting rate, I certainly imagine that the Illinois Finincial Planning lobby would be VERY happy to see this pass…

Comment by Mr. Smith Tuesday, Mar 1, 16 @ 11:54 am
Based on his example from the sjr. When teachers retire, they’d need to take the lump sum and somehow get well over a 10% return on investment EVERY YEAR, in order to equal the amount they would get if they just keep their pension. (Assuming they draw out what they would have gotten with a pension)

Mr. Batinick if anyone could guarantee that rate of return on investments, they wouldn’t be a teacher.

However I do agree, give people the option, I just hope you do a better selling job.(maybe get a catchy jingle on the tv)

Comment by Person 8 Tuesday, Mar 1, 16 @ 11:57 am
==Lastly, nearly 20% of new SURS employees are choosing to manage their own retirement.==

These new employees are all Tier II with very poor retirement benefits compared to the Tier I employees whom this bill is supposed to target. As with the GM employees, this is a meaningless comparison.

I did not express it well yesterday,* but we can look at the stats in recent years for Tier I retirees who opted for the portable plan but, in the end, did not leave the university before retirement. They face a similar choice between a lump sum payment and, in many cases a somewhat reduced, Tier I annuity . That should lead to a meaningful estimate of how many Tier I retirees would choose the new option offered by this bill. I’m pretty sure it’s a negligible fraction, and it might even cost the state more.

* I did not mean to imply that the portable plan and this proposal are equivalent overall, but clearly, my wording did leave that impression.

Comment by X-prof Tuesday, Mar 1, 16 @ 12:01 pm
Representative Batinick deserves credit for trying to keep the pension wolves at bay with something that allows workers to keep their status quo. I suspect he’s right that more people would take it than you’d think.

Comment by Independent retired lawyer, journalist Tuesday, Mar 1, 16 @ 12:05 pm
How does this reduce the unfunded liability? This appears to be privatization of pensions. Good for the vendors not anybody else.

Comment by Seymourkid Tuesday, Mar 1, 16 @ 12:07 pm
== How does this reduce the unfunded liability? ==

The proposal gives the retiree less than full current value. The difference is a reduction in the unfunded liability. See my comments yesterday explaining how it would work out.

Comment by RNUG Tuesday, Mar 1, 16 @ 12:11 pm
Did the Representative survey educators about his proposal prior to authoring the legislation? If yes, how many responses did he secure? Or did he just assume that what is acceptable in the business world is automatically acceptable in the education world?

Comment by Buzzie Tuesday, Mar 1, 16 @ 12:19 pm
Read David Harvey’s Seventeen Contradictions and the End of Capitalism. He addresses point number three. People with 401k’s are like minnows swimming among barracudas. The odds of an individual being successful are remote.

Comment by pension focused Tuesday, Mar 1, 16 @ 12:23 pm
Wow! Tough crowd. I can see some situations where it might be a good idea, and might help both parties. Not many but some. I think it a little unfair to assume that this is only presented for reasons of theft or appeal to vanity.

Comment by Niblets Tuesday, Mar 1, 16 @ 12:25 pm
@ union man. There are several reasons for you to consider it. Most people spend more money early in retirement than later. Your payout can and should grow. My parents are 20+years retired. Their 401k balance today is the same as the day they retired. It is not that hard. Financial planners try to scare all of us to make money. Dont spend more than you make. Invest safely and live well

Comment by jeffinginChicago Tuesday, Mar 1, 16 @ 12:29 pm
In fairness to the Rep., it’s an option that people who has the appropriate counseling can choose. However, retirement accounts are not guaranteed. They are subject to economic ups and downs. My “safe” retirement account has lost thousands. Not good, but not a crisis because I have my annuity. Those without it would be in trouble.

Comment by Norseman Tuesday, Mar 1, 16 @ 12:30 pm
It’s good that he’s trying to present constitutional ideas but I’ll definitely keep my traditional pension.

Comment by Anonymous Tuesday, Mar 1, 16 @ 12:34 pm
==The proposal gives the retiree less than full current value. The difference is a reduction in the unfunded liability. See my comments yesterday explaining how it would work out.==

No the difference goes to the vendor who makes the payout.

Comment by Seymourkid Tuesday, Mar 1, 16 @ 12:44 pm
== No the difference goes to the vendor who makes the payout. ==

You are thinking of the Fortner proposal, not the Batinick one being defended / discussed here.

Comment by RNUG Tuesday, Mar 1, 16 @ 12:51 pm
What about selection bias? People who don’t expect to live long after they retire, especially those who’s spouses have died, would be taking an awful lot more from the pension fund with this lump sum that we would pay for the few years they may have left. Suppose a terminal person retires due to their disease. Now they can get 75% of the value of the assumed value of their pension. No one will take this to their own detriment unless they are extremely short sighted. I could easily see this ending up costing the state more. The reasons pensions work for people living to 100, is that others only live to 65. This will remove some portion of the people who end up taking less than their share from the fund. This bill is intended to be a giveaway to financial services, not to save the State money.

Comment by Me too Tuesday, Mar 1, 16 @ 12:51 pm
I agree that this will only benefit pocket cases of annuitants as proposed. No way would 30% of those eligible take the buyout as they did with GM. However, even if the actual number is closer to 5%, it could still be a net win for the systems.

Also, different people have different circumstances. Somebody sitting on $50k of CC debt paying 20+% interest, somebody sitting on a house grossly underwater, etc…maybe this would work for them.

Most importantly, I think this gets the conversation started on a constitutional path to recovery. Start offering cash and non-cash consideration for giving up specific benefits.

Comment by ryan Tuesday, Mar 1, 16 @ 12:54 pm
I worked at Ford through 1994 (only 7 years). A couple years ago they offered a buy-out. They were offering the full value to age 65. This was to get non fully vested employee liabilities off their books. I took, rolled it over into my IRA and it worked out great. With the state, there would be no way that I would give up my guaranteed Tier 1 pension.

Comment by BBG Tuesday, Mar 1, 16 @ 1:01 pm
=Also, different people have different circumstances. Somebody sitting on $50k of CC debt paying 20+% interest, somebody sitting on a house grossly underwater, etc…maybe this would work for them.=

Would locked-out or striking workers trying to survive be able to take this?

Comment by Qui Tam Tuesday, Mar 1, 16 @ 1:02 pm
===IRA withdrawals are taxed by the state.===

No, they aren’t.

Comment by Anon Tuesday, Mar 1, 16 @ 1:15 pm
Concerning Rep. Batinick’s suggestion about rollovers into IRAs, I wonder if he is aware of the Dept of Labor’s proposed fiduciary rule which, if finalized as written, could have profound implications for small business as well as the individual small investor.

http://www.dol.gov/ebsa/newsroom/fsconflictsofinterest.html
http://www.benefitspro.com/2016/01/29/dol-fiduciary-rule-sent-to-omb-whats-next-and-wher?slreturn=1456858804&page=4
http://www.dol.gov/ebsa/pdf/1210-AB32-2-00686.pdf

Comment by yinn Tuesday, Mar 1, 16 @ 1:25 pm
It’s always a good thing to have options as there are many different life situations. This one appears to be Constitutional and I suppose it may be able to be tweaked in future years. I do think the Rep has a lot more explaining before many would consider it though. If I was making a retirement decision in the next five years, I would certainly want to see the detailed numbers but don’t think it would have interested me.

Comment by Slippin' Jimmy Tuesday, Mar 1, 16 @ 1:27 pm
The Proven Inefficiencies of Defined Contribution Savings Plans for Retirement
http://goo.gl/CJJJ8e
Pension is way better than 401K

Comment by doedoa Tuesday, Mar 1, 16 @ 1:34 pm
GM had to pay full value of the retirement annuity to the employees who took the lump sum. (Articles written at the time noted that until a recent change in law, they would have had to pay a premium). Batinick’s plan would pay only 75% of the full value of the annuity. Huge difference. If it didn’t cheat the retirees, there would be no savings.

BTW, the same articles point out that GM didn’t gain financially from the buyout. It just removed a very risky liability from its books by paying cash to retirees who took the lump sum and to insurance companies who assumed the liabilities for those who didn’t.

Comment by Whatever Tuesday, Mar 1, 16 @ 1:55 pm
I have a pension payment but i need cash now. Call Bruce 877-cash-now. (Sorry no emails)

Comment by Golfman-r Tuesday, Mar 1, 16 @ 2:01 pm
== I have a pension payment but i need cash now. Call Bruce 877-cash-now. (Sorry no emails) ==

No problemo … sign here and we’ll give you some magic beans to plant

(Sorry, I just couldn’t resist that one …)

Comment by RNUG Tuesday, Mar 1, 16 @ 2:16 pm
It’s unlikely many would take this option until there is a constitutional change to allow the pensions to be adjusted. Once that happens then this offer looks much, much better.

Comment by Maximus Tuesday, Mar 1, 16 @ 2:50 pm
== It’s unlikely many would take this option until there is a constitutional change to allow the pensions to be adjusted. Once that happens then this offer looks much, much better. ==

Not even close. The courts have ruled the contract begins at time of hiring. Even without the Pension Clause, straight Contact Law forbids making an involuntary change to the contract (also see pre-1970 court decisions use as precedent in post-1970 decisions). Current employees’ pensions can’t be touched. And you don’t need to change the Constitution to change benefits for new hires (see Tier 2 as one example).

Comment by RNUG Tuesday, Mar 1, 16 @ 3:11 pm
Batinick’s reason #2 (you can will an IRA, not a pension) seems like a solid argument for why a small percentage of folks (those in poor health; those with special needs child) might rationally choose this option.

Comment by Robert the Bruce Tuesday, Mar 1, 16 @ 3:21 pm
Robert the Bruce @ 3:21 pm ==Batinick’s reason #2 (you can will an IRA, not a pension) seems like a solid argument for why a small percentage of folks (those in poor health; those with special needs child) might rationally choose this option.==

And for those people, a buy-out will increase the costs of public employee pensions.

Comment by Whatever Tuesday, Mar 1, 16 @ 3:52 pm
Exactly Whatevs! The vast majority of those who take this deal will take it because it means they receive more money than they would otherwise, those in poor health or dying, those who worked well into their 70s, and those without a survivor.

This is like an insurance company saying they want to reduce risk by getting rid of all of their very good drivers, and making up for it by giving them the average premium they charged that year regardless of risk.

Comment by Me Too Tuesday, Mar 1, 16 @ 4:10 pm
The only thing that caught my eye was the phrase “to stop being a political football”. Not many, if any would fall for this plan to take a lump sum, but the political football fallout has been severe. It takes a toll. For that reason alone, I cannot see anyone who can find employment elsewhere taking a job in the public sector. Unless you enjoy being harassed and demeaned in the press (and elsewhere) on a daily basis.

Comment by AnonymousOne Tuesday, Mar 1, 16 @ 4:10 pm
I agree that there might be a small number of employees who would benefit from this plan.

And maybe the Supreme Court would allow it because the option is completely voluntary.

I just don’t believe a large number of employees are going to take their lump sum and go out and gamble in the markets. And it would take a large number to make a dent in the state’s pension debit–about $111 billion, right?

So our legislators are wasting their time and ours tweaking the pension system for the possible benefit of a small number of employees.

I guess that’s their way of ignoring the elephant.

Comment by Cassandra Tuesday, Mar 1, 16 @ 4:15 pm
==and you don’t need to change the Constitution to change benefits for new hires==

I’ve never understood why they haven’t moved forward with making changes for new hires. IF they are all yapping about 401k’s then fine, make that the standard for new employees.

Comment by Demoralized Tuesday, Mar 1, 16 @ 4:27 pm
== I guess that’s their way of ignoring the elephant. ==

Not really. They’ve (generic pols) made such a big deal out of the pensions being THE problem, they need a shiny bill where they can claim they have done everything they could and now the only solution is the tax increase we all know is needed.

Comment by RNUG Tuesday, Mar 1, 16 @ 4:28 pm
Public workers have been demonized so much in the last decade that something has to be done. Or at least, we have to have the appearance that something is being done.

Let’s say they want to reduce the State’s pension funding requirement from 90% to 80%. Now that pensions have been vilified extending our payments isn’t going to look good.

Tack on some ‘options’ and ‘changes’ that ‘could’ fix things (like this bill) and you open up new paths to real solutions that were too toxic to consider before.

Comment by Stuff Happens Tuesday, Mar 1, 16 @ 4:55 pm
Dang, I missed RNUG’s comment [@4:28] which said the same thing, and more succinctly.

Comment by Stuff Happens Tuesday, Mar 1, 16 @ 4:55 pm
That could backfire, though. When the lists get published of those multi-hundred-thousand dollar lump sums, the average taxpayer may not view that information in context, so to speak. Can we assume those payouts are public info?

Comment by Cassandra Tuesday, Mar 1, 16 @ 5:21 pm
== Dang, I missed RNUG’s comment [@4:28] which said the same thing, and more succinctly. ==

LOL. Everyone’s opinion is welcome. And years ago I would have used a lot more words … just ask Rich! Commenting here has been like a graduate course in focused writing.

Comment by RNUG Tuesday, Mar 1, 16 @ 5:37 pm
I’ve been approached by people who just want to cash out so that they can stop being a political football. Can you blame them?

Ya ok lol

Comment by foster brooks Tuesday, Mar 1, 16 @ 6:36 pm
RNUG, I usually agree with most of your thoughts,……however, “the tax increase we all know is needed”. Is not one of them. An across the board increase in the income tax is an extreme burden on the lower and low-middle class. Wage stagnation is rampant on these groups, and will , in my opinion, place a burden on those who can least afford it. If MJM has any Progressive bones left in his body, a progressive tax structure must be part of a deal. LOR(lots of respect).

Comment by Blue dog dem Tuesday, Mar 1, 16 @ 7:59 pm
- Blue dog dem -

I’m inclined to agree a progressive income tax and / or a Millionaire’s surcharge, both of which would require a constitutional amendment, would be the best options. But a fast and quick fix would be returning to the 5% flat tax and may be the best we can do short term.

Other alternatives, like a service sales tax, would also be mostly regressive. I also don’t see getting any elimination of corporate tax breaks passed any time soon either.

Making retirement income taxable would be a bit of a long shot, especially given the proposals seem to deliberately (punatively?) target pensions. If they taxed all retirement income with a high exemption, it may be more politically palatable and legal enough to withstand a challenge.

And to pull your leg a bit, I’ll note I said tax increase without specifying the form … which you automatically assumed would be raising the flat income tax.

Comment by RNUG Tuesday, Mar 1, 16 @ 8:15 pm
-commenting here has been like a graduate course in focused writing-

Well said, RNUG. I get frustrated at most other blogs I follow because folks don’t consider the economy of expression.

Read an interesting comment from one of our commenters on Fred Klonsky’s blog. Professor Andrew Smazkary suggests this program will turn out into a version of adverse selection as only actives with serious health issues will consider taking the lump-sum. That’s an argument upon which I look forward to hearing the actuaries’ view.

Comment by Arthur Andersen Tuesday, Mar 1, 16 @ 8:19 pm
== Read an interesting comment from one of our commenters on Fred Klonsky’s blog. ==

Klonsky often has some good columns.

Comment by RNUG Wednesday, Mar 2, 16 @ 8:33 am