Three parts of Gov. Bobby Jindal’s retirement reform program will undergo their first legislative test today. The House Retirement Committee is scheduled to conduct hearings on a proposed cash balance plan for new state employees, the merger of two existing education systems and a move to add the state commissioner of administration to the boards of three retirement systems.
House Bill 60 merges the Louisiana School Employees Retirement System into the Teachers Retirement System of Louisiana. Members of the school employee system aren’t happy about the proposal, but the idea hasn’t generated as much heat as other parts of the governor’s program.
HB 54 makes the commissioner of administration a board member of the state employee, school employee and teacher retirement systems.
Other bills that are more controversial are still waiting in the wings. One is a measure that would increase the retirement age to 67 for members of the Louisiana State Employees Retirement System and highereducation members of the Teachers Retirement System. Another would use five-year instead of three-year average salaries to compute pensions. The third would increase employee contributions in the LASERS retirement system from 8 percent to 11 percent.
The LASERS board has voted to oppose all three measures. However, it doesn’t reject the idea of creating a cash balance retirement plan for newly hired state employees.
“A cash balance plan is not necessarily a bad idea,” according to Cindy Rougeou, LASERS executive director. “The problem with this legislation is it raises more questions than it answers.”
Rougeou may get some answers to those questions at today’s hearing. Meanwhile, just what is a cash balance retirement plan?
Retirement plans come in two major categories. State employees, for example, are currently members of a defined benefit plan. The state and employees make contributions to the plan and members of the system draw a set monthly pension when they retire. You know what you are putting in and have a general idea of what you will get back when you retire, which depends on the size of your salary at that time.
Then, there are defined contribution plans that have become the norm in the private sector. Members of those plans know what they and their employers are contributing, and those contributions are invested. So the success of those plans depends on market conditions. You know what you are putting in, but not what you might receive when you retire.
Citizens who like defined contribution plans believe they can do a better job handling their own investments, and are willing to take the risks. Others, like me, prefer to depend on someone else to do their investing.
Cash balance plans are a relatively new version of the defined benefit plan. The promised benefit at retirement is an account balance.
Rep. Kevin Pearson, R-Slidell, chairman of the House Retirement Committee, is sponsor of the cash balance plan for new state employees. It affects persons who go to work for the state on or after Jan. 1, 2013, and who are qualified to become members of LASERS. New higher-education employees who are qualified to become members of the teachers retirement system are also included.
Employees would contribute 8 percent of their salaries to the cash balance plan. The Legislature every year would determine the size of the employer’s (the state’s) contribution, which would be based on total projected state payroll to keep the retirement system financially sound. The contributions of both would then be invested.
The beauty of the proposed plan is the fact members’ accounts don’t suffer from investment losses. Those losses would be covered by the state.
When members of the cash balance system retire, they can take their account balance in a lump sum or set up an annuity that would pay them a certain amount annually.
The federal Employee Benefits Security Administration uses the example of a person who is ready to retire with $100,000 in his account balance. He could set up an annuity paying him about $10,000 a year for life or choose to take the lump sum amount. In some cases, the lump sum payment can be rolled over into an individual retirement account (IRA).
LASERS officials talked about problem areas. They believe more time is needed to implement the cash balance plan, and it shouldn’t become effective until Jan. 1, 2014. Total contributions of 12 percent (8 percent from employees) should be higher, they said, to cover expected costs of the plan. And they said lump sum payments could create retirement insecurity.
Whether the Jindal administration is willing to consider changes to its cash balance proposal remains to be seen. The governor has made some concessions on his plans to increase the retirement age and employee contributions, but here is what he said about the cash balance plan when it was first announced:
“This is a responsible plan which will, according to actuarial modeling, provide a retirement benefit that is at least as generous as Social Security’s when market conditions are bad, and it will provide a benefit that is far better when market conditions are good,” Jindal said.
Don’t look for the governor to give a lot of ground on this one.
Jim Beam, the retired editor of the Lake Charles American Press, has covered people and politics for more than ÿve decades. Contact him at 494-4025 or [email protected].