drtdrums Posted July 13, 2010 Share Posted July 13, 2010 I'm not going to say much about this or why I know it, but there is a certain state in the union that pays 17.6% of their police officers' wages into a defined benefit program as long as the employee pays 1.6%. For those of you who understand these programs, tell me: How in the seven devils could anyone expect that this would be sustainable? Is it sustainable and I just don't realize it? Link to comment Share on other sites More sharing options...
chipwhich Posted July 13, 2010 Share Posted July 13, 2010 I'm not going to say much about this or why I know it, but there is a certain state in the union that pays 17.6% of their police officers' wages into a defined benefit program as long as the employee pays 1.6%.For those of you who understand these programs, tell me: How in the seven devils could anyone expect that this would be sustainable? Is it sustainable and I just don't realize it? How is what sustainable? I would assume it's a defined contribution plan, whereas the state isn't on the hook to pay retirement after the policeman retire, they fund the program as they go (17.6% plus 1.6%) and so there is nothing to "sustain" as in its already been paid. Link to comment Share on other sites More sharing options...
PeterMP Posted July 13, 2010 Share Posted July 13, 2010 You're essentially paying the cops an extra 17.6%. It's sustainable the same way the salary the cop makes is sustainable- through taxes. Link to comment Share on other sites More sharing options...
drtdrums Posted July 13, 2010 Author Share Posted July 13, 2010 Defined Benefit vs Defined Contribution http://www.urs.org/general/pdf/db_vs_dc.pdf Link to comment Share on other sites More sharing options...
chipwhich Posted July 13, 2010 Share Posted July 13, 2010 Defined Benefit vs Defined Contributionhttp://www.urs.org/general/pdf/db_vs_dc.pdf Right what you described is a defined contribution plan. Why would you ask how it's sustainable? It's the way all smart companies are handling future retirement programs. Link to comment Share on other sites More sharing options...
PeterMP Posted July 13, 2010 Share Posted July 13, 2010 What is the final pay out based on? Are you saying the cops make 17.6% of their final salary? Link to comment Share on other sites More sharing options...
drtdrums Posted July 13, 2010 Author Share Posted July 13, 2010 No. Not at all. It is DB, not DC. Ideally, the taxpayer doesn't get caught on the hook for the pension. A reasonable (10-12%) amount would be invested in the usual vehicle. The pension should experience an overall gain if run properly, but in periods of loss, the taxpayer does indeed fund the original percentage (in this case, 1.6% + 17.6%) in addition to making up for the losses of the pension plan (DB participants are guaranteed their employee + employer contributions be used to compute their retirement). Link to comment Share on other sites More sharing options...
PeterMP Posted July 14, 2010 Share Posted July 14, 2010 No. Not at all. It is DB, not DC. Ideally, the taxpayer doesn't get caught on the hook for the pension. A reasonable (10-12%) amount would be invested in the usual vehicle. The pension should experience an overall gain if run properly, but in periods of loss, the taxpayer does indeed fund the original percentage (in this case, 1.6% + 17.6%) in addition to making up for the losses of the pension plan (DB participants are guaranteed their employee + employer contributions be used to compute their retirement). Well, you left out a lot of details for a DB to determine if it is sustainable. What is the final pay out based on? What is the average salary structure of a cop (how much does it go up with time)? After how long on the job? To whom (just the cop or their spouse, kids, etc.)? What is the average life expectancy of the person/people? The answer based on the info you've given is who knows? Link to comment Share on other sites More sharing options...
drtdrums Posted July 14, 2010 Author Share Posted July 14, 2010 +4% COLA, 5 years vesting, DROP eligible at 25 years svc, retirement at 60. The benefit depends on far too many factors to list here (option + circumstance...there's a reason actuaries get paid what they do, I suppose). I haven't seen a benefit under 5% per year. But I'm just curious as to how a state-run DB can offer such huge employer contributions in any state and not have to pay the piper. Even when times are good, 17.6% seems about 7% too high for a DB even for cops. The whole idea of a DB is that you give up reward to escape risk. This certainly doesn't play into that. Link to comment Share on other sites More sharing options...
PeterMP Posted July 14, 2010 Share Posted July 14, 2010 +4% COLA, 5 years vesting, DROP eligible at 25 years svc, retirement at 60. The benefit depends on far too many factors to list here (option + circumstance...there's a reason actuaries get paid what they do, I suppose). I haven't seen a benefit under 5% per year. But I'm just curious as to how a state-run DB can offer such huge employer contributions in any state and not have to pay the piper. Even when times are good, 17.6% seems about 7% too high for a DB even for cops. The whole idea of a DB is that you give up reward to escape risk. This certainly doesn't play into that. 17.6% is huge amount for a contribution, but really it depends on the other factors related like the cops salary. If they've traded present salary for retirement benefits it might be fine. But also many states agreed to benefit packages that are unreasonable in the mid to late-90s based on the economy at the time and are still adjusting so that might be an issue too. **EDIT** Where states have gotten KILLED with defined benefit packages is where the payout is based on end of career earning (last year or even average of last few years), and based on the contract, it is possible to manipulate final earning by working extra (i.e. overtime some how or in the case of higher ed faculty- teaching summer and winter classes). The end result is these people are able to manipulate their long term retirement salary by working extra the last year or two before they retire. In addition, if there is a method to make money post-retirement (in the cause of faculty they can normally get adjunct positions even where they were as a full time faculty member, and I'd guess with cops as acting as a security guard or consultant), then they can retire at reasonable ages, make a reasonable amount of money, and even continue to do what they want on a flexibile scheduele. (I will point out this is rarely an issue for science faculty at research level institutions as they need the institutional resources (i.e. students and equipment) to do their research and normally, you have push them out the door, if they leave before dying.) Simply by changing the way the benefit is calculated to be based on real salary and not earnings, a state could save themselves a lot of money. Link to comment Share on other sites More sharing options...
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