Reforming the public retirement system

By MARIA FRICA PANGELINAN
Special to the Saipan Tribune

First of a two-part series

There has been a great deal of discussion about the current state of the Retirement Fund, and its future. Some of these conversations have been driven by fear and uncertainty. Clearly, it has been emotional, and understandably so. If your pension is your sole source of income, any discussion about change is a source of anxiety. Unfortunately, much of what has been said has, however well intentioned, been at best, piecemeal and premature, and at worst, inaccurate. This has served only to heighten angst and even create anger.

One certainty is that change is occurring. The financial stability of the Retirement Fund is deteriorating. Unfortunately, although the reasons are clear, the answers are no longer simple. Reforms must be made.

Another fact is that every member of the Legislature and the Executive Branch of your government are also members of the Retirement Fund. We are all concerned about preserving its ability to meet at minimum, its original mandate. We also are future beneficiaries of any reforms that are undertaken. I invite the administration of the Retirement Fund to work with the Legislature and the Executive branch in a spirit of cooperation to the ultimate goal of regaining the solvency of both the fund and our Commonwealth. We all have a stake in the future of the Retirement Fund. Clearly, the current situation is not working.

I am intimately involved with the research, the writing and the weighing of the long term effects of these reform proposals. I am also working diligently to understand the interrelatedness of various pieces of legislation and how they may serve the greater good, immediately, and long term. The work is complex. We are, however, not operating without professional legal help. We work with in-house attorneys, and attorneys that have been specifically assigned to assist on these projects. We have met with both the Retirement Fund administration and their actuarial consultants. Each legislator must understand the consequences of every addition or revision in each proposal, and how they interact. This takes time, and it should. My support or opposition will rest on the results of my research, some of which will include your fact-based input.

Will what I share with you today ease your fears? Perhaps, then again, perhaps not. More importantly, as citizens of the CNMI you have a right to clear, concise and accurate information. You deserve an opportunity to consider and voice your conclusions about issues we are all faced with. Part of my job is to help you, as best I can, understand the pros and cons of these issues and the consequences of not taking any action. I hope, if you are a public employee, you can take the time to sit down and read this and discuss it with your peers.

The Legislature had been working for months on several large, interrelated proposals, all with the same overall goal in mind, to return the Commonwealth to solvency. Please notice that I did NOT say, return the “Commonwealth government” to solvency. The solvency issue is not just about government. All people in our Commonwealth are facing, to some degree or another, the same economic difficulties. The proposals are large in scope. Some of them are long overdue, others are forward thinking, new and fresh. All are important, and none are final.

The Retirement Fund is at the center of some of these legislative proposals. There are a few basic facts that are important for you to understand about the Retirement system as it is today.

If nothing is done to reform the retirement system, it will not be able to continue to pay benefits at the current level.

If you are already retired, and the NMIRF declares bankruptcy, it will absolutely negatively affect your benefit payments.

Under the proposed legislation the level of benefit payments to current retirees is not going to change.

If the government is forced to immediately pay the approximately $124 million arrears of employer contributions, the only option would be to raise taxes in the NMI. Considering the current economic state of our Commonwealth, this burden, in addition to the coming increase in utility rates, make this level of taxation simply impossible for any of us, business or family, to bear.

There are several factors which have contributed to the precarious state of the Retirement fund. You all know this, but I state them again:

1. Since the Retirement fund was established, at least 22 legislative amendments have increased benefits to impossibly exceed the total of contributions and returns on investment.

2. The government has spent more money than it has received for several years. To cover payments elsewhere, it chose to delay and pay less than its required contributions to the Fund.

You’ve heard these generalities over and over, it is easy to gloss through them. But I ask you to consider this. The NMI government chose to not participate in the US Federal Social Security system for its employees. The NMIRF was originally set up only to replace Social Security. Well, it has, and then some.

Retiree benefits have been increased far beyond the original goal of replacing Social Security. When comparing the current array of retiree benefits to US averages, the NMIRF is the envy of nearly every pension package that exists in the US today. Here are some comparisons, based on the NMIRF 2004 Actuarial report.

The Social Security minimum benefit is $33.20 per month.

The NMIRF minimum benefit is $500 per month

The average Social Security benefit is currently $1,002 per month.

The average pension benefit from the NMIRF is approximately $1,583 per month.

The maximum Social Security benefit available is currently $2,053 per month.

The maximum pension benefit being paid by the NMIRF is not specifically stated in any report I have access to, but it is possible that, if you work for 20 years, your highest three years of salary is at $100,000/year, and you retire at age 62, your monthly benefit payment could be over $7,000. Some NMI government retirees are receiving more than this amount.

In the Social Security system, if you are under age 70, and earn wages in addition to receiving Social Security, you also may be penalized by a reduction in your benefit payments.

If you are a retiree of the NMIRF, whether you return to employment with the government, or work in the private sector, your monthly retirement benefits are not reduced, even if they are suspended during your reemployment with the government.

These comparisons make it clear that we have lost sight of the original goal of the Retirement Fund.

Has the Legislature made mistakes by increasing benefits to the point of risking the survival of the Fund and the Government? Yes.

Has the government collectively been irresponsible with its deficit spending, therefore putting the Retirement Fund at risk? Yes.

Is it possible to do nothing and expect the Fund to survive? No.

Can the government just “pay up”, what it owes to the Retirement Fund? No.

That is pretty much the reality we are faced with. The only responsible thing to do is work on solutions.

The Senate recently passed SB 15-47 that creates a new way for public employees to save for retirement. If passed by the House, signed by the Governor and enacted into law, this new plan will be the available option for new public employees who would have previously joined the defined benefit plan (pension). It would also allow non-vested current employees to transfer into it.

Let me make it clear that the Defined Contribution plan is NOT a rewrite of the Pension Reform Act. It is one piece of a group of reforms that are designed to move the government back to solvency and fiscal prudence, while preserving a way for public employees to save for a reasonable retirement. The Pension Reform Act is still in progress, it has not yet become a bill.

A defined contribution plan is not an experiment. It is a time-tested plan that has been approved by the Federal government for over 20 years. There are many well known and reputable administrators of defined contribution plans. Some of you may have heard of 401k plans. 401k plans are approved by the Federal government for use by private companies. This legislation outlines a 401k “style” Federally approved plan for use by governments and their employees. The average historical rate of return on investments of these plans is 10.5 percent.

There are many differences between pension funds and defined contribution plans.

The table you see below highlights the major differences.

DEFINED BENEFIT PLANS

RETIREMENT BENEFITS
“Promises” the participant a monthly benefit at retirement, calculated on salary, age, and years of service

BENEFIT OF MEMBERSHIP
Employee saves for their retirement years.

COST OF LIVING ADJUSTMENTS
Available

MEMBERSHIP REQUIREMENTS
Currently, all public employees of the NMI must participate in the defined benefit plan.

RETIREMENT ACCOUNTS
None, the contributions are pooled in a common fund.

ABILITY TO PLAN FOR RETIREMENT
Members receive benefits calculated by law, laws can be changed.

INVESTMENT RESPONSIBILITY
Members are not responsible for, nor are they in control of investment choices.

VESTING IN FUNDS
Until after 10 years of service, an employee “owns” their contribution, in the respect that they may receive it, as a refund, plus 3.5 percent interest, if they leave government employment. After 10 years of service, they must wait for retirement age to receive a benefit.

INVESTMENT RISK/REWARD
Returns on investment have no bearing on the retiree benefits unless: there is so great a loss from investments by the Fund, as to preclude payment of full benefits, laws are passed to reduce benefits to future retirees, the fund goes bankrupt, or current retirees receive benefits that are so generous that current employee’s future retirement benefits are in jeopardy.

INVESTMENT CHOICES
None

HISTORICAL RETURNS
The NMIRF has a historical return on their investments of approximately 9 percent

EMPLOYER CONTRIBUTIONS
Currently, the employer’s contribution is approximately 39 percent of the member’s gross pay, and unsustainable.

EMPLOYEE CONTRIBUTIONS
Currently Class II Member’s payroll contribution is 9 percent, Class I member’s contribute 6.5 percent of their gross pay.

PAYROLL TAXES
Payroll taxes are calculated on your gross pay.

LOANS
Yes, for the purchase a home.

PORTABILITY FOR VESTED MEMBERS
Vested members who leave government employment before retirement age must leave their funds in the plan until they reach retirement age. No additional benefits are accrued.

PORTABILITY FOR NON-VESTED MEMBERS
Members who leave government employment before retirement age must receive a refund of their contributions plus 3.5 percent simple interest. Income taxes are due on this refund. The employer’s contribution is not included as part of the refund.

DEFINED CONTRIBUTION PLAN

RETIREMENT BENEFITS
Benefits are based on the amount contributed and are also affected by income, expenses, gains and losses.

BENEFIT OF MEMBERSHIP
Employee saves for their retirement years.

COST OF LIVING ADJUSTMENTS
Not available

MEMBERSHIP REQUIREMENTS
Under SB 15-47, all new public employees must participate in the defined contribution plan. Current members of the defined benefit plan who have less than 10 years of service may transfer their contributions plus interest to the defined contribution plan.

RETIREMENT ACCOUNTS
Members each have an individual account that contains both the employee’s and the employer’s contribution.

ABILITY TO PLAN FOR RETIREMENT
Members receive regular (usually quarterly) statements of their individual account’s progress, and have access to real-time status via phone and computer.

INVESTMENT RESPONSIBILITY
Participants have a certain degree of control over how their funds are invested

VESTING IN FUNDS
Employees are immediately fully vested in their contributions. They control the investment choices, and their account is credited for returns on investments. Over a period of 5 years of service, they attain full vesting in the employer’s contributions, plus any returns on investment. They are, from the beginning of their membership, in control of the investment choices for the employer’s contributions.

INVESTMENT RISK/REWARD
Participants can benefit from good investment results, and also experience losses based on their investment choices. Members are investing not only their contribution, but the employer’s. US Federal law precludes the employer from not making the employer’s contribution.

INVESTMENT CHOICES
The plan administrator is responsible for offering reasonable investment choices in “packages” that offer different levels of risk/reward. Classes and individual assistance are provided to members.

HISTORICAL RETURNS
Historical returns on investments in a DCP is 10.5 percent

EMPLOYER CONTRIBUTIONS
Under SB 15-47, the employer’s contribution is 4 percent of the employee’s gross pay.

EMPLOYEE CONTRIBUTIONS
Under SB 15-47, members will contribute 10 percent of their gross pay.

PAYROLL TAXES
Payroll taxes are calculated after the employee’s contribution is deducted.

LOANS
Yes, for the purchase a home
Yes, for medical hardship of a member or their dependent.
Yes, for education of a member or their dependent.

PORTABILITY FOR VESTED MEMBERS
Members who leave government employment before retirement age may “roll” their funds including the employer’s contributions into another tax-deferred investment fund, and continue to invest until retirement age.

PORTABILITY FOR NON-VESTED MEMBERS
Members who leave government employment before retirement age may “roll” their funds, including the returns on investment, and the vested portion of the employer’s contribution plus the returns on investment into another tax-deferred investment fund, and continue to invest until retirement age. Members may choose to receive this amount as a distribution, in which case income taxes, are due.

(Maria Frica Pangelinan is a senator in the 15th Legislature.)