A New Jersey taskforce has suggested moving new hires for schools, municipalities, and state government into a hybrid benefits plan to help shore up the state’s badly funded pension system.
At 31%, New Jersey has an $81 billion shortfall, making it one of the worst-funded states in the country.
The New Jersey Economic and Fiscal Policy Working Group—a committee of politicians, economists, and finance experts—released a proposal last week about fixing the state’s pension problems, along with questions about local and property taxes, and other government related issues. For the pensions, the group called for a “shift from the current defined benefit pension system to a sustainable hybrid system that combines the best elements of both a defined benefit, maintaining a traditional annuity-based pension, and defined contribution system.”
The team’s hybrid system would “create a blended defined benefit/defined contribution plan” for non-uniformed state, county and municipal government, and school employees with less than five years of service. Employees with five or more years would be exempt from the switch.
It also would raise the full benefits retirement age to whatever the Social Security collection age would be in the year of an individual’s retirement.
The proposal tinkered with two options concerning the hybrid plan’s structure. One was to let employees keep the first $40,000 of income and start a cash balance account for everything above that. The cash balance plan would guarantee a minimum 4% return, or half of the pension system’s earnings. The other choice was to put all the money into a cash balance account.
“This will produce an immediate savings in both the unfunded liability and in the required contribution in the same way that the 2011 law did by limiting pensionable income for new hires to the Social Security limit (currently set at $128,400 in 2018),” the report said.
Employees in the new plan could opt out of their cash balance account for a 401(k)-style plan.
This mostly affects the Public Employees’ Retirement System ($29.2 billion in assets) and the Teacher’s Pension and Annuity Fund ($24 billion). The economic study group said that “the continuation of the current [defined benefit] system is unsustainable,” and that the hybrid pension system was necessary to save workers’ retirement income.
The $26.4 billion Police and Fireman’s Retirement System was recently given the authority to manage its own money separately from the $77.3 billion New Jersey Pension Fund and would not be affected by this change, hence the non-uniformed clause.
The hybrid system’s concept will be developed over the next four months to be considered by Gov. Phil Murphy and the New Jersey Legislature as part of the next budget analysis.