[Joint House and Senate Hearing, 110 Congress]
[From the U.S. Government Publishing Office]
S. Hrg. 110-772
YOUR MONEY, YOUR FUTURE: PUBLIC PENSION PLANS AND THE NEED TO
STRENGTHEN RETIREMENT SECURITY AND ECONOMIC GROWTH
=======================================================================
HEARING
before the
JOINT ECONOMIC COMMITTEE
CONGRESS OF THE UNITED STATES
ONE HUNDRED TENTH CONGRESS
SECOND SESSION
__________
July 10, 2008
__________
Printed for the use of the Joint Economic Committee
U.S. GOVERNMENT PRINTING OFFICE
44-947 WASHINGTON : 2009
-----------------------------------------------------------------------
For sale by the Superintendent of Documents, U.S. Government Printing
Office Internet: bookstore.gov Phone: toll free (866) 512-1800
Fax: (202) 512-2104 Mail: Stop IDCC, Washington, DC 20402-0001
JOINT ECONOMIC COMMITTEE
[Created pursuant to Sec. 5(a) of Public Law 304, 79th Congress]
SENATE HOUSE OF REPRESENTATIVES
Charles E. Schumer, New York, Carolyn B. Maloney, New York, Vice
Chairman Chair
Edward M. Kennedy, Massachusetts Maurice D. Hinchey, New York
Jeff Bingaman, New Mexico Baron P. Hill, Indiana
Amy Klobuchar, Minnesota Loretta Sanchez, California
Robert P. Casey, Jr., Pennsylvania Elijah Cummings, Maryland
Jim Webb, Virginia Lloyd Doggett, Texas
Sam Brownback, Kansas Jim Saxton, New Jersey, Ranking
John Sununu, New Hampshire Minority
Jim DeMint, South Carolina Kevin Brady, Texas
Robert F. Bennett, Utah Phil English, Pennsylvania
Ron Paul, Texas
Michael Laskawy, Executive Director
Christopher J. Frenze, Minority Staff Director
C O N T E N T S
----------
Members
Hon. Robert P. Casey, Jr., presiding, a U.S. Senator from
Pennsylvania................................................... 1
Hon. Earl Pomeroy (invited to attend), a U.S. Representative from
North Dakota................................................... 4
Hon. Kevin Brady, a U.S. Representative from Texas............... 17
Hon. Amy Klobuchar, a U.S. Senator from Minnesota................ 18
Hon. Charles E. Schumer, Chairman, a U.S. Senator from New York.. 19
Witnesses
Statement of Will Pryor, vice chairman of the Board of
Investments, Los Angeles County Employees Retirement
Association, Pasadena, CA...................................... 8
Statement of P. Sherrill Neff, partner, Quaker BioVentures,
Philadelphia, PA............................................... 10
Statement of Christian Weller, Ph.D., senior economist, Center
for American Progress, Washington, DC.......................... 13
Statement of Barbara D. Bovbjerg, Director, Education, Workforce
and Income Security Issues, U.S. Government Accountability
Office, Washington, DC......................................... 15
Submissions for the Record
Prepared statement of Senator Charles E. Schumer, Chairman....... 39
Prepared statement of Senator Robert P. Casey, Jr................ 41
Letter dated July 10, 2008 from legislative representatives
on behalf of 20 national organizations to Senator Casey.... 43
Letter dated July 10, 2008 from Kenneth W. Marzion, CEO of
CAlPERS to Senator Casey................................... 46
Chart entitled, ``Defined Contribution Plans Are Nearly Four
Times as Expensive To Administer''......................... 48
Chart entitled, ``Defined Benefit Plans Provide Better Income
Security for Retirees''.................................... 49
Prepared statement of Representative Earl Pomeroy................ 50
Prepared statement of Representative Carolyn B. Maloney, Vice
Chair.......................................................... 52
Prepared statement of Senator Sam Brownback...................... 53
Article, ``The Other Real Estate Disaster,'' Forbes Magazine,
July 21, 2008.............................................. 56
Article, ``A Code of Silence,'' Forbes Magazine, July 21,
2008....................................................... 62
Prepared statement of Will Pryor, vice chairman of the Board of
Investments, Los Angeles County Employees Retirement
Association, Pasadena, CA...................................... 64
Prepared statement of P. Sherrill Neff, partner, Quaker
BioVentures, Philadelphia, PA.................................. 67
Prepared statement of Christian Weller, Ph.D., senior economist,
Center for American Progress, Washington, DC................... 70
Prepared statement of Barbara D. Bovbjerg, Director, Education,
Workforce and Income Security Issues, U.S. Government
Accountability Office, Washington, DC.......................... 78
YOUR MONEY, YOUR FUTURE: PUBLIC PENSION PLANS AND THE NEED TO
STRENGTHEN RETIREMENT SECURITY AND ECONOMIC GROWTH
----------
THURSDAY, JULY 10, 2008
Congress of the United States,
Joint Economic Committee,
Washington, DC.
The Committee met at 10 a.m. in room SD-106 of the Dirksen
Senate Office Building, the Honorable Robert P. Casey, Jr.,
presiding.
Senators present. Casey, Schumer, and Klobuchar.
Representatives present. Brady, Pomeroy, and Cummings.
Staff present. Christina Baumgardner, Ted Boll, Chris
Frenze, Tamara Fucile, Jim Gilroy, Gretta Goodwin, Rachel
Greszler, Colleen Healy, Robert O'Quinn, Jeff Schlagenhauf,
Annabelle Tamerjan, Christina Valentine, and Jeff Wrase.
OPENING STATEMENT OF HON. ROBERT P. CASEY, JR., A U.S. SENATOR
FROM PENNSYLVANIA
Senator Casey [presiding]. The hearing will now come to
order. I want to thank everyone for taking the time to be here
this morning.
I'll give you an outline of how we'll proceed from this
point. I am going to deliver an opening statement, and then
we'll turn to Members of the Committee.
Well see, in terms of who appears, in what order, and we'll
try to accommodate Members. It's a busy morning for both the
Senate and the House, and we'll be as accommodating as we can.
Why don't I just start with my opening, and then we'll
eventually get to our witnesses. We'll have Members who will be
delivering opening statements, as well, but we'll try to keep
within the 5-minute window that we, of course, ask our
witnesses to comply with, so we'll try to do that, as well.
But I do want to thank everyone for taking the time to be
here. I was saying to the Congressman, Congressman Pomeroy,
that the Joint Economic Committee has had an opportunity to
review a lot of important issues over many years.
I've been in the Senate 18 months, but I'm not sure we've
ever had this big room, and I gave him the credit for it, of
course, because he's the one sitting next to me.
[Laughter.]
Senator Casey. But it's nice to have the extra room in a
great hearing room, and we're grateful for that today.
The subject of our hearing today, sounds rather obscure to
many Americans, and even to all of us here on Capitol Hill: The
role of defined benefit pension plans in the American Economy.
However, this type of pension plan plays an important role,
a very important role, for reasons that we'll explore today.
Historically, most public and private employers offered
their employees defined benefit plans, which pay an annuity
based upon the employee's salary and years of service upon
retirement.
Under this arrangement, employers and employees share the
risk, share the risk of loss of market declines or bad
investments of retirement assets and other risks.
Employers offering defined benefit pension plans take on
the responsibility of investing retirement funds, either
directly, or through outside fund managers.
By contrast, defined contribution plans, like the 401(k)s
that most people have today, allocate all investment risk to
employees. Over the past 30 years, defined benefit plans have
come under severe attack. That's an understatement.
In the private sector, corporate defined benefit plans have
declined substantially. Just consider this: In 1975, not too
long ago, 88 percent of private-sector workers were covered by
defined benefit plans--88 percent. In 2005, that number had
shrunk to 33 percent of the private-sector workforce.
There have been a number of well publicized attempts to
eliminate defined benefit plans for public pension funds and
multi-employer, or so-called Taft-Hartley funds.
Just today, in fact, in the New York Times, an op ed blames
the demise of General Motors on its defined benefit pension
plan. It seems a little strange to me to blame the struggles of
a company that has gone from 50-percent market share to 20-
percent market share, on the men and women working on the line.
We'll have some debate about this, but that's basically, in
my judgment, what that op ed does. I'm sure we'll have some
disagreement about that. This is America and we can disagree,
right?
I would also note that the article in today's New York
Times mentions in passing that General Motors fell behind on
fully funding its pension obligations. That's a continuing
theme in this discussion.
That has the double costs of requiring increased
contributions later and losing out on market gains in good
times.
The GM case only proves that underfunding retirement needs
has long-term costs. That's true of any retirement plan,
whether it's defined benefit or defined contribution.
I served a decade in Pennsylvania as an elected official,
in two Statewide elected offices, the Office of the Auditor
General and the Office of State Treasurer, and I took a
particular interest in the two-State public pension funds for
teachers and for public employees, which are traditional
defined benefit plans.
As Auditor General, I audited both funds, and as State
Treasurer, I served as Trustee for both funds. It gave me an
insight and gave my staff an insight into the benefits of a
well-run defined benefit plan, and in both cases, both for
retirees and for our economy as a whole.
Defined benefit plans have been proven to earn better
returns than defined contribution plans over the long run. For
example, a recent study showed that defined benefit plans
outperformed defined contribution plans by 1.8 percent per year
over an 8-year time period.
This is because defined benefit plans are professionally
managed, particularly in their asset allocation decisions, and
in addition, have access to alternative investments like
venture capital, private equity, real estate, and hedge funds.
These ``patient capital'' investments actually increase the
return to a pension fund, while reducing overall risk to the
fund's portfolio. Alternative asset categories have low
correlation with other asset classes.
That is, they don't behave--and I know this, for even
people who have been exposed to this, this gets a little murky,
some of the terminology for the uninitiated, but basically,
what we're talking about there when we talk about the
correlation question, is they don't behave in the same way that
private equity or fixed income markets do, so that when stocks
go down, investments like venture capital may not, so it's--
it's kind of counterintuitive, and the experts here will
explain this better than I will.
Defined benefit plans are a key factor in attracting and
keeping excellent teachers, firefighters, police, social
workers, and other employees. We can't say this enough. It's
lost in the discussion.
One of the biggest problems we have in America today, in
terms of our workforce and in terms of meeting priorities like
public safety, like healthcare--go down the list--is
recruitment and retention. I hear it all the time in the
healthcare field.
In order to take care of those in the twilight of their
lives, older citizens, we've got to recruit and retain
qualified healthcare personnel.
We hear it in the context of so many other parts of our
economy, and the same is true when it comes to our pension
plans and those who are doing this important work, like
teachers and firefighters and police officers and social
workers and other public employees.
The best and the brightest of our policemen and
policewomen, firefighters, and teachers have a big incentive to
stay in their jobs rather than switch careers because of the
promise of pension benefits in retirement.
Multi-employer or Taft-Hartley defined benefit plans play
the same role for workers in many of our important industries,
including manufacturing, building trades, and others, as well.
Money invested in defined benefit plans typically stays
there until the employee leaves or retires, and as a result,
defined benefit plans can invest in less liquid, alternative
asset classes such as venture capital, which are crucial to job
creation, particularly in high-tech industries.
This is also lost in the discussion. These discussions
aren't limited to the employees. These discussions aren't
limited to the jargon and the terminology. The discussions
we'll have today impact the wider economy, whether we're
competitive or not in a world economy, whether we create high-
tech jobs or not.
So this isn't some distant, obscure topic. This is about
creating jobs and building an economy here in America.
Over 40 percent of investment capital for venture capital
funds in the United States now comes from defined benefit
plans--40 percent.
Today, we'll hear from a number of witnesses. We'll hear
from four: An active firefighter from Los Angeles who's also a
Trustee of his defined benefit pension fund; a well-known
economist who has written extensively about this issue; a
venture capitalist from Philadelphia who manages money for a
number of defined benefit plans and invests in the biotech
industry; and a representative of the General Accountability
Office, who has studied this subject.
During this hearing, I believe there is one broader issue
we must all keep in mind, and that is the issue of how we
allocate risk in our society. It concerns me that some here in
Washington and across America, want ordinary Americans to
assume sole liability for decisions regarding their healthcare,
their pension, and their Social Security.
These are risks that have been traditionally shared with
employers or with the Government. If we also want people to
take 21st century global economy type risks like changing jobs,
stopping out for more education and training, or--and those
starting their own businesses, we cannot also dump all of the
risk of healthcare and retirement on them.
I'm also concerned that moving billions of dollars of
retirement assets from defined benefit plans to defined
contribution plans adds substantially to the risk we're asking
ordinary Americans, our workers, to take.
I plan to ask each of the witnesses today, as well as a
number of our other interested parties, for specific
recommendations on what to do about the future of defined
benefit plans, and at a minimum, we should ensure that the
circumstances that led to the decline of defined benefit plans
in the corporate world are not repeated in the public or Taft-
Hartley sectors.
With economic stability and economic security on the minds
of all Americans, I look forward to discussing these issues
with our witnesses today.
[The prepared statement of Senator Casey appears in the
Submissions for the Record on page 41.]
Senator Casey. Now, at this time, I'll turn to Congressman
Pomeroy for his opening, and we'll go from there. Congressman,
thank you very much for being here today and for your long and
enduring work on this important issue.
OPENING STATEMENT OF HON. EARL POMEROY, A U.S. REPRESENTATIVE
FROM NORTH DAKOTA
Representative Pomeroy. Chairman Casey, thank you. This is
a good week for pensions, and it was about time we had a good
week on Capitol Hill.
Yesterday, the House passed on the Suspension Calendar, at
long last, the Technical Corrections Act for the Pension
Protection Act. Importantly, it included additions that were
initiated by the Senate, relative to asset-smoothing, as well
as credited interest rates for public plans.
These had been missing in the initial Technical Corrections
Act passed by the House. They are important, in fact, vital
improvements, and I'm very pleased that the Senate took its
action, very pleased that the House passed the bill with a
strong bipartisan vote on the Suspension Calendar.
The second dimension of this being a good week is this
hearing, Mr. Chairman.
I have now been in Congress for more than 15 years and I
have been astounded at the absence of discussion, the lack of
hearing oversight and inquiry into this seismic shift we've
seen in the retirement savings area, from the defined benefit
structure to the defined contribution structure.
We moved from where the participation in savings from a
universal context in a defined benefit plan, to voluntary
context in a defined contribution plan; placing investment
decisions upon the employee, even while investment advice was
lacking; expecting Baby Boomers entering a whole new medical
world, in terms of what might be expected in terms of life
expectancy and retirement years, expecting them to self-insure
the longevity risk and make their assets match the expected
time on earth.
All of those are tremendous risk elements transferred to
the individual in the defined contribution context. It's
occurred, not only without any particular point of concern
being raised on Capitol Hill, but we have certainly, in my
opinion, made all the wrong moves in terms of strategies to
preserve defined benefit structures.
I cite, in particular, the Pension Protection Act advanced
by the Department of Labor, and cheerleaded by the Pension
Benefit Guaranty Corporation, even while they failed to
evaluate what might be the consequences for plan freezing under
the new stringent funding requirements.
Well, it all has been a very bleak picture, one we need to
turn around, because we're on the precipice, in my opinion, of
a very serious income security and retirement crisis.
One-third of the Boomers on the doorstep of retirement have
no financial assets, as reported by the GAO. The median savings
of those with financial assets is $45,900.
The 2008 Retirement Confidence Survey reflected a drop of
one-third in terms of confidence, with only 18 percent of
workers very confident that they'll have assets through the
retirement years, down from 27 percent a single year before.
I believe, for these reasons, you're precisely spot-on in
finding a public good in pensions, and therefore, something
Congress and the Administration ought to be advancing is ways
to enhance and protect and stabilize this component of the
retirement picture.
But we're seeing exactly the opposite occur when 3.3
million workers have seen their pension benefits frozen in some
way. The most recent PBGC data on insured plans has found that
single-employer plans frozen at the end of the year in 2005,
increased by 48 percent over the 2-year period in 2003.
And we can certainly expect that this period with stringent
funding requirements, a market downturn, and low interest rates
is going to be, in my opinion, deeply punishing on those
corporations that want to continue to fund pension plans. Many
will freeze their plans.
There is good news, and I know you're going to have it as a
part of this hearing in the public pension plans. They protect
the retirement security of 12 percent of the Nation's
workforce; $150 billion in the checkbooks of 7 million retirees
every year.
The trustees invest $3 trillion of assets into our economy.
They, as you mentioned, ensure that those who serve the public
are going to have their needs met through the defined benefit
structure in their retirement years.
Without oversight and regulations, these pensions have
funded nearly 90 percent of their outstanding retirement
liabilities. Now, some plans are underfunded, but let us not
confuse that for the broad picture.
In the broad picture, they are 90-percent funded. Alicia
Munnell at the Center for Retirement Research, has said, quote,
``the miraculous aspect of the funding of State and local
pensions, is that they have been fully funded without Federal
law having application to their funding levels.''
Well, I believe that it is very important that we early and
strongly push back on those, in my opinion, that want to
continue their effort to take down the defined benefit
structure in the private sector by now looking at the public
sector, to continue this same assault on the defined benefit
pension structure.
I don't think that this has all been accidental, Mr.
Chairman. I believe there are those that wanted to take this
protection away from the American worker, and I think that it
is completely wrong-headed, as wrong-headed as the efforts to
privatize Social Security.
So, I think that having the information about the value of
these plans and assessing their funding structure in a calm and
reasonable way is precisely what's critically been lacking from
the discussions on Capitol Hill. I'm so pleased that you're
adding it here this morning.
I'm going to have to take my leave, regrettably, from this
hearing. I anticipated being here all morning, but the House
Agriculture Committee, of which I am a member, is looking at
speculative activity in the commodities marketplace. That will
involve pension funds, too, and I need to excuse myself to
participate in that hearing, but I thank you very much for
allowing me to make these words, and I'll have a statement for
the record, if you'd agree to accept it.
[The prepared statement of Representative Pomeroy appears
in the Submissions for the Record on page 50.]
Senator Casey. Well, Congressman, I appreciate your being
here, and for your work on this. I hope that with your
departure we can still stay in the room that you got us. Is
that OK?
[Laughter.]
Representative Pomeroy. Yes. As a House member, I would
say, yes, use any facility over here you like.
[Laughter.]
Senator Casey. And we will make sure your statement is made
part of the record. Thank you very much. We appreciate it.
Representative Pomeroy. Thank you, Mr. Chairman.
Senator Casey. Thank you. And also I want to note that
we'll have other Members who, if they don't appear, will have
statements for the record.
I do want to note two things for the record, before I
introduce our witnesses: One is that I want to note my receipt
of written correspondence from 19 different national
organizations representing State and local governments and
officials, public employee unions, public retirement systems,
and more than 20 million public employees and beneficiaries
expressing support for our efforts on this issue.
I'd like to submit that for the record.
[Correspondence referenced above appears in the Submissions
for the Record on page 43.])
Senator Casey. And also for the record, Congresswoman
Maloney, who is a co-Chair of this Committee, has asked that
her statement be made part of the record.
She's attending a House hearing today, with Chairman
Bernanke of the Federal Reserve Board, as well as Treasury
Secretary Paulson, so that's obviously a significant conflict,
and we wanted to note that. She's here virtually every hearing
we've had, and I appreciate her leadership, in general on the
Committee, but also in particular, her work on issues like
pensions, and income, retirement and economic security.
But I wanted to note that she'll have a statement for the
record, which we will include.
And, as we go, we'll have other statements for the record,
as well.
[The prepared statements of Representative Maloney and
Senator Brownback appear in the Submissions for the Record on
pages 52 and 53, respectively.]
Senator Casey. What I'll do, I think, now, is, rather than
introduce our witnesses all at one time, what I think I'll do,
is introduce each witness and just do a summary of their
biography, have them do their statement, and then we'll go to
the next witness.
I think I'm going to be going left to right here. Mr. Pryor
will be first, and I'll just do a quick summary of his
biography.
William Pryor is vice chairman of the Los Angeles County
Employee Retirement Association. He is currently serving as
Chair of that Association. He's an active-duty firefighter.
Talk about someone who's in the trenches, understanding the
challenges we face with this issue, he's an active-duty
firefighter in the county of Los Angeles.
He's stationed in Huntington Park, he has been an elected
trustee of that association since 1999. The Association has a
$40 billion pension plan that provides a defined benefit
pension and retiree healthcare program to over 90,000 retirees
of the county of Los Angeles.
Mr. Pryor has spent--has represented, I should say, 19
years doing the work of representing the work of firefighters
as an IAFF Union representative in Los Angeles County, and has
held several positions in the local union.
He's an active trustee and an executive board member of the
National Conference of Public Employee Retirement Systems,
known by the acronym, NCPERS.
He speaks frequently on the economic impact of defined
benefit pension plans, and the necessity of defending those
plans from political and corporate-sponsored attacks.
He's an active member and supporter of the Council of
Institutional Investors, and the International Corporate
Governance Network, the so-called ICGN, as they advocate for
open markets and providing value to investors through good
corporate governance.
Mr. Pryor lives in Long Beach, California, and spends his
off-duty time with his family. Mr. Pryor, we thank you for
being here, for making the long trip, and for your witness here
today as someone who is not just familiar with these issues,
but has lived the life of a firefighter, and we commend you for
that work.
Try, as best you can, to keep it at 5 minutes. Thank you.
STATEMENT OF WILL PRYOR, VICE CHAIRMAN, BOARD OF INVESTMENTS,
LOS ANGELES COUNTY EMPLOYEES RETIREMENT ASSOCIATION, PASADENA,
CA
Mr. Pryor. Thank you, Mr. Chairman. Today I'd like to
discuss the importance of pensions to my fellow firefighters,
as well as the importance of the pension benefits and pension
fund investments to our local and national economies.
Long before firefighters learn how to make a hydrant at a
real fire or the right way to pull a ceiling, we learn the
importance about our pensions.
Veteran firefighters make it a point to take rookies aside
and let them know, under no uncertain terms, what their
pensions mean to them and what their pensions will have, once
that rookie puts some time on the job.
Admittedly, this is a self-serving conversation. These
veteran firefighters are ensuring that their own futures will
be protected by a new generation willing to take future fights
to save their pensions and support their unions' fights for
quality retirement.
For firefighters, a pension means that we will have time to
heal our bodies after 33 years of service. Seventy-six percent
of my members, leave the job with an injury that prevents them
from future work that is any more strenuous than sedentary.
This pension helps them to have a decent salary replacement
that will never run out, good medical care, and solid survivor
benefits for their families when they die, which may be in the
line of service.
Our pension system also provides to the residents we serve.
Our Department spends a lot of money training its employees.
Paramedic duties, hazardous materials, arson detection, urban
search and rescue, wild land firefighting and fire prevention,
are not easily learned and very expensive to train.
Offering a good pension with a benefit payout, only after
vesting or spending a career with that agency, makes it less
likely that employees will leave the job after getting this
training and experience.
The public pensions do more than ensure that a community
has good public servants. They also mean that when a public
employee retires, they can support their local economy, rather
than needing to compete with the local job market, or being a
drain on local public services.
In the aggregate, public pension payments have had a huge
impact on California's economy. As detailed in my written
testimony, public pension payments to California public
employment retirees in 2006 reached $25.5 billion with a total
economic impact of some $41.5 billion in the California
economy.
By design and with great success, California's retirement
systems also invest heavily in California. They are a key
player in private venture, public equity, and real estate
investment centered in our State.
These investments mean jobs, many jobs for Californians,
that otherwise may have not been created. These investments
also mean significant community improvements.
While our pension assets fund real estate projects across
the board, all projects have bettered the communities we serve.
Urban in-fill projects, develop inner city properties into
housing for middle-income workers, who otherwise would face a
3-hour commute, just to get to work.
We're also funding rural revitalization programs.
What our pension plans are doing for California, is not
unique. Traditional defined benefit pension plans in both
public and private sectors, play an important role in the
overall U.S. and international economic cycle.
Pension plans play a unique profile as asset managers. They
are long-term, patient investors who generally base investment
decisions on annual returns or on returns over several years,
not just the next quarter.
Where retail funds or even institutional funds have
immediate demands to produce over the short term, pension plans
are able to make the sorts of investments that may not be fully
realized for as long as 20 years.
Pension plans can also use their capital to smooth economic
volatility, as we're seeing in the current credit crisis.
Specifically, many lenders have shuttered their doors to many
kinds of financing, including private equity.
Pension plans, however, are making private equity
investments at a high rate, plugging the hold that the lending
banks have left, and have provided much needed capital into the
economy.
In conclusion, I'd like to thank you for giving me the time
today, letting me share with you, what my fellow firefighters
have known for years. Traditional public pension plans are
sound retirement vehicles that not only act as an employee
benefit, but also have a tremendous impact on those who we
serve. I'd be happy to answer any questions.
Thank you, Mr. Chairman.
[The prepared statement of Mr. Pryor appears in the
Submissions for the Record on page 64.]
Senator Casey. Thank you very much, Mr. Pryor. I think you
came under the limit. That never happens in Washington.
[Laughter.]
Mr. Pryor. Well, when I read it last night, it was right at
5 minutes. I don't know what happened.
Senator Casey. It sometimes happens with witnesses; it
never happens with the United States Senators.
[Laughter.]
Senator Casey. So we're grateful. I'm allowed to say that.
Mr. Pryor. No comment.
[Laughter.]
Senator Casey. I can say that and no one can do anything to
me when I say it.
Our next witness is P. Sherrill Neff, who is a partner in
Quaker BioVentures. He's founding partner of Quaker
BioVentures.
Mr. Neff was previously chairman of the Greater
Philadelphia Venture Group, and also was president of the
Pennsylvania Biotechnology Association.
He sits on several boards of directors. I won't mention
every one of them. Prior to forming Quaker BioVentures, he was
president, chief operating officer, and director of a
technology company, a publicly traded life sciences company.
He also was senior vice president of Corporate Development
at U.S. Healthcare, and also formerly a managing director in
the Investment Banking Division of Alex Brown and Sons, and
formerly a lawyer with the law firm of Morgan, Lewis and
Bachius, a tiny little law firm in Philadelphia and other
places--no, it's actually very large.
Mr. Neff is a graduate of Wesleyan University and the
University of Michigan Law School. I would say for the record
that I know him and he's obviously a Pennsylvanian, so we have
no bias here at all.
[Laughter.]
Senator Casey. But we're grateful for your presence here,
and look forward to your testimony.
STATEMENT OF P. SHERRILL NEFF, PARTNER, QUAKER BIOVENTURES,
PHILADELPHIA, PA
Mr. Neff. Thank you, Mr. Chairman and good morning. Quaker
BioVentures is a venture capital firm that invests only in life
sciences.
Currently, we manage over $700 million in total committed
capital, of which approximately 75 percent comes from large
public and private defined benefit plans. Our current investors
include ten different public pension funds from six different
States, and also major corporate defined benefit plans.
Today I'd like to explain how the venture capital industry
raises and invests its money, the economic implications of this
investment, and the importance of defined benefit plans in that
equation.
Venture capital is a relatively small but extremely unique
subsector of what many institutional investors refer to as
alternative assets. Venture capital funds are set up as limited
partnerships, generally, in which sophisticated institutional
investors or limited partners, LPs, provide capital to a fund
managed by a group of venture capitalists or general partners,
GPs.
The GPs then invest this capital, along with their own
capital, in very high-risk private, startup, and early stage
companies that demonstrate a tremendous promise for high growth
over a very long term.
Our typical investment horizon for a venture-backed
company, is 5 to 10 years, often longer, and, given the very
high-risk nature of this investment, many venture-backed
companies ultimately fail.
However, those that do succeed, return top dollar to
investors and create many jobs and revenues for the U.S.
economy.
You've heard today about many of the positive contributions
that defined benefit plans offer their participants. I would
like to address an attribute that may be less well known, and
that is the role of these plans in the funding and growth of
the venture capital industry, and more importantly, the young,
innovative companies that make up the entrepreneurial segment
of the U.S. economy.
Defined benefit pension plans have historically been a
sizable and reliable pool of capital for venture fund
formation, and thereby, for investment into the Nation's
emerging growth companies.
The U.S. venture capital industry would not be the economic
engine it is today, without the strong investment participation
from defined benefit plans.
The growing importance of these private plans in the
retirement income equation was begun in 1974 with the enactment
of ERISA, followed by the 1979 issuance of the Labor
Department's Prudence Regulation which interpreted ERISA as
allowing pension plans to invest in young, smaller companies.
As a direct result of the Prudent Man Rule, a relatively
small allocation of money from public and private pension funds
began to flow at that time into the venture capital space.
Back in 1980, private independent venture funds had just a
total of $4 billion in capital under management, and that has
risen to $257 billion in capital under management in 2007. Much
of this growth is attributable to the success of venture
capital investment and the receptivity of defined benefit plans
to the high returns the asset class has afforded them.
The mix of limited partners is changing. Because many U.S.-
based private pension plans have been converted from defined
benefit plans to defined contribution plans over the past
years, we are seeing fewer private pension plans actively
investing in venture.
This has been particularly acute on the corporate side so
far. Filling that gap are LPs from outside the United States,
including foreign public and private pension funds, who are
becoming increasingly interested in investing in U.S.-based
venture capital funds.
U.S. public pension plans continue to be critical and
reliable sources of capital for U.S. venture funds. Most State
pension funds and many local public pension funds invest a
small portion of their assets in venture capital because they
understand that venture capital can deliver high returns that
boost the overall financial position of the fund.
Today, all but a few States permit their public pension
funds to invest a small amount of their assets into the venture
capital asset class. States that have been long-term venture
capital investors include California, Washington, Pennsylvania,
and Wisconsin.
Venture capitalists who take defined benefit pension plans
into their funds do so because these fund managers are long-
term patient investors who understand the nuances and risks of
venture investing.
When a defined benefit pension plan invests in a venture
capital fund, it is not only creating higher returns for its
pensioners, but it's also supporting one of our country's most
important economic engines.
Literally thousands of companies would not exist today were
it not for the venture capital investment support they received
early on.
In our portfolio alone, our companies are developing novel
approaches to eye disease, diabetes, depression, infectious
disease, cancer, rare genetic diseases, et cetera.
On the tech side of the world, similarly, companies whose
names are now newspaper headlines, like Cisco, Google, eBay,
Yahoo, FedEx, et cetera, and countless other companies were all
at one time or another, just ideas that needed startup capital.
Last year, U.S.-based venture capital-backed companies
accounted for more than 10.4 million jobs and generated over
$2.3 trillion in aggregate revenue. Nearly 1 out of every 10
private-sector jobs is at a company that was originally
venture-backed.
Almost 18 percent of our U.S. GPD comes from venture-backed
companies. None of this would have been possible without the
active investment of public and private defined benefit pension
plans.
The relationship between the venture industry and defined
benefit managers is symbiotic, and it creates high returns for
investors and their beneficiaries, and it also creates high
returns for the U.S. economy.
Thank you very much for the opportunity to weigh in on this
important issue.
[The prepared statement of P. Sherrill Neff appears in the
Submissions for the Record on page 67.]
Senator Casey. Thank you very much. We're joined by Senator
Klobuchar and Representative Brady. I know that in the Senate
we'll be having a vote, probably in about 10 minutes or 15
minutes, so we may have to intersperse some opening statements
between our witnesses.
But let me introduce our third witness, Dr. Christian E.
Weller who is a senior fellow at the Center for American
Progress.
His expertise is in the area of retirement income security,
macro economics, and international finance.
Prior to joining the Center for American Progress, he was
on the research staff of the Economic Policy Institute where he
remains a research associate.
Dr. Weller has also worked at the Center for European
Integration Studies at the University of Bonn in Germany and
also is a respected academic with close to 100 publications.
Don't worry, we won't read all those today.
[Laughter.]
Senator Casey. He was also, in 2006, awarded the
Outstanding Scholar Practitioner Award from the Labor and
Employment Relations Association.
He's frequently cited in the press and is often a guest on
national TV and radio programs. He's got a Ph.D. in Economics
from the University of Massachusetts.
Dr. Weller, thank you for your presence here, and we look
forward to your testimony.
STATEMENT OF CHRISTIAN WELLER, PH.D. SENIOR ECONOMIST, CENTER
FOR AMERICAN PROGRESS, WASHINGTON, DC
Dr. Weller. Thank you, Mr. Chairman, and thank you, Members
of the Committee for inviting me here today for this important
hearing.
In my testimony today, I will make the case that public
sector defined benefit pension plans offer adequate retirement
benefits on a sustainable and efficient basis.
Consider for a minute, if you will, what a model retirement
would look like and compare that to what actually defined
benefit plans in the public sector look like.
First of all, such a plan would offer broad coverage. In
the public sector, eligible public-sector employees are
automatically enrolled.
Second, funds would be secure for retirement. In the State
and local DB plans, beneficiaries typically cannot borrow from
their pension; there are no lump-sum payments, and plan
sponsors typically do not liquidate.
Third, the plan would offer lifetime benefits, and because
assets are secure, public-sector pension plans are better
suited than other plans to offer annuity lifetime income.
Fourth, benefits would be portable between jobs. Often if
employees move to another Government position within the State,
or in some cases, out of State, they can purchase service
credits.
Fifth, the plan would offer survivorship and disability
benefits. State and local government DB plans typically provide
survivorship and disability benefits for workers and their
families.
Disability benefits are particularly important for State
and Government employees in hazardous occupations, such as
police officers and firefighters.
Survivorship benefits are particularly important for women
who still tend to have much lower retirement incomes and higher
life expectancies than men.
Sixth, both employers and employees would contribute to a
plan. In the public sector, employer contributions comprised
about 18 percent of all public pension revenue from 1996 to
2006. Investment earnings made up 73 percent of revenue and
employee contributions accounted for the remaining 9 percent.
Seventh, the assets would be professionally managed. In
analyzing public-sector pension plan investment behavior,
Professor Jeffrey Winger from the University of Georgia and I
found that State and local plans exercise a great deal of
prudence in their asset allocation and that these plans may
have actually become more cautious in their asset allocation
following a period of underfunding after 2000.
Eighth, participants would face loan costs and fees. Costs
are relatively low for DB plans, and I'll talk more about this
later due to economies of scale, professional management, and
risk-sharing.
Because public-sector plans typically meet all of the
criteria for a model retirement plan, beneficiaries receive
secure retirement benefits, the private sector enjoys a source
of stable, long-term financing, and governments can allocate
taxpayer dollars in a fiscally responsible manner.
Let me talk a little bit about adequate retirement
benefits. The National Institute of Retirement Security
recently summarized the evidence on DB pensions and adequate
retirement income and found that retirees with DB pensions are
much more likely to have adequate retirement income than those
relying solely on DC plans.
Public-sector plans offer adequate, but not lavish
retirement benefits. In simulations done for Pennsylvania, my
co-authors and I found that a typical retiree can come close to
but not exceed a typical standard of adequate retirement income
equal to about 75 to 80 percent of pre-retirement earnings.
These plans are efficiently run. This retirement is
achieved efficiently. It is estimated that asset management
fees average just 25 basis points for public pension plans, or
between 35 to 145 basis points less than for individual
accounts.
That adds up substantially over long periods of time. Also,
DB plans can take advantage of broader diversification
strategies, allocating a small percentage of their holdings to
so-called alternative investments in venture capital, hedge
funds, and private equity.
These investments can help to improve the returns of a
plan's portfolio, by introducing assets whose returns are not
correlated with each other. Professionally managed DB plans
consistently outperform individually managed DC plans.
One widely cited estimate from the Center for Retirement
Research, puts the difference in annual return at 0.8
percentage points. Other estimates are even larger than that.
Further, DB plans lower costs by pooling mortality risks.
Because an individual does not know what their ultimate
lifespan will be, each person must ensure that he or she
accumulates enough savings to last for the maximum lifespan and
not just the average lifespan, as would be the case under a DB
plan.
A DB plan will require fewer assets to be accumulated than
the comparable DC plan, reducing costs by 15 to 35 percent.
Finally in conclusion, public-sector retirees will be
secure in their golden years and less likely to rely on public
assistance, which is often offered through State and local
government employees to retirees who do not have enough private
savings.
Public-sector plans serve as a patient source of capital
for many productive investments because they are prudently
managed with a long-term investment horizon.
And finally, they are ultimately an efficient and
sustainable retirement savings vehicle for public employers
managing fiscally responsible taxpayer dollars.
Consequently, many design features DB plans already apply
to DC plans, and automatic savings, universal coverage, and
safer, lower-cost investment options are among them.
In the end, though, much of what public-sector DB plans can
offer will be hard or impossible to recreate in the DC setting,
hence policymakers at the Federal and the State level should
help strengthen existing DB plans in the private sector and the
public sector where appropriate, as well.
Thank you very much for the chance to talk to you.
[The prepared statement of Dr. Weller appears in the
Submissions for the Record on page 70.]
Senator Casey. Thank you very much. Our fourth witness is
Barbara Bovbjerg, who is the Director of Education, Workforce,
and Income Security Issues at the U.S. Government
Accountability Office.
In that capacity, Barbara oversees evaluative studies on
aging and retirement income policy issues, including Social
Security and private pension programs; operations and
management at the Social Security Administration, the Pension
Benefit Guarantee Corporation, and the Employee Benefits
Security Administration of the Department of Labor.
She was previously Assistant Director of Budget Issues at
the GAO where she managed a variety of budget policy projects,
including studies on the long-term effects of budget deficits.
Before joining GAO, she led the Citywide Analysis Unit of
the DC Budget Office and analyzed State and local government
finance issues for the Urban Institute, as well.
She holds a Master's Degree in public policy from Cornell
University, and a B.A. from Oberlin College, and we appreciate
her being here today and look forward to her testimony. Thank
you.
STATEMENT OF BARBARA D. BOVBJERG, DIRECTOR, EDUCATION,
WORKFORCE, AND INCOME SECURITY ISSUES, U.S. GOVERNMENT
ACCOUNTABILITY OFFICE, WASHINGTON, DC
Ms. Bovbjerg. Thanks so much, Mr. Chairman. One thing my
bio didn't mention was that I was born in the Commonwealth of
Pennsylvania.
Senator Casey. I'm very happy to hear that.
Ms. Bovbjerg. I did mean to put it on there.
Senator Casey. You get an extra 15 minutes.
Ms. Bovbjerg. OK.
[Laughter.]
Ms. Bovbjerg. All right, thank you. Well, thank you, Mr.
Chairman and Members of the Committee. I should have said in my
bio that we have also been doing work on public plans over at
GAO.
I am especially pleased to be here today. We've done a
couple of reports in the last year on public plans and have not
yet had an opportunity to speak about them before Members of
Congress, so we're especially excited.
As Mr. Pomeroy had noted earlier, there are nearly 20
million active employees and 7 million retirees and dependents
who rely on the pension promises of State and local
governments.
And although these pension plans are largely not subject to
Federal laws that govern plans in the private sector, the
retirement security of millions of public employees is
nonetheless a Federal concern, and that's why we're here today.
Today, my testimony describes the structure of the benefit
plans and their financial soundness, and it is, again, based on
the reports we issued last year.
With regard to plan structures, most State and local
governments offer the traditional defined benefit pensions as
the primary plan for their workers, as we've heard from other
witnesses. Nationwide, about 90 percent of full-time State and
local employees participate in such plans, and that includes
general government employees, teachers, and public safety
workers.
In Fiscal Year 2006, the DB plans covered over 18 million
of these workers, paid $152 million in benefits to more than 7
million beneficiaries. Unlike in the private sector, most of
these plans require participants to make contributions
calculated as a percentage of their own pay.
Each of the 50 States makes a defined contribution plan
available to public employees, but generally as a supplemental,
voluntary plan without an employer match. However, there are
three States--Alaska, Michigan, and the District of Columbia--
who offer defined contribution arrangements as primary plans.
These are similar to the 401(k)s that have come to dominate
the private-sector retirement benefit world. A few States have
hybrid plans as primary, and these, like cash balance plans you
may have heard about, combine features of defined benefit and
defined contribution plans--both.
State constitutions, local government charters, and
statutes at both levels nearly universally protect public
employee pensions from being eliminated or diminished.
Thus, workers who are hired under a particular plan cannot
lose future benefit accruals, even if the plan is closed to new
hires. In public plans, changes that reduce benefits must only
be applied to those hired after the changes take effect, much
like the Federal Government did when shifting from the Civil
Service Retirement System to the Federal Employees Retirement
System.
Also in some locales, benefit formulas are specified in
law, which in effect, bars even changes like the CSRS to FERS,
because benefit specifications would be different.
So, it's not surprising that public pension benefits have
changed so little over the years. But let me now turn to the
finances.
Although a few plans have reported very low funding levels,
most State and local plans have enough resources set aside to
pay for benefits promised for decades to come.
And even for plans with poor funding, benefits are
generally not at risk in the near term because current assets
and new contributions are likely sufficient to support benefits
for at least several years.
However, many governments have contributed less than the
amount needed to improve or even maintain current funding
ratios; that is, the percentage of liabilities that their
assets cover.
Such low contributions raise concerns for the future and
may in effect, shift costs to future generations of taxpayers,
since benefit changes under current State and local laws
generally take decades to have an impact on the public budget.
Available data suggest that although more than half of
plans reporting to the Public Funds Survey had a funded ratio
of more than 80 percent, which is generally considered adequate
for public plans, these 2006 results suggest that funding
levels have fallen steadily since 2000. Because State and local
governments, unlike private employers, are expected to continue
operations indefinitely in the future and are unlikely to go
out of business, public pension plans are unlikely to present
themselves for Federal bailout, even with these falling funding
levels.
Indeed, a simulation we performed last year, suggested that
just slightly higher contributions from governments as a sector
would fund plans overall for the next 40 years. However, rising
healthcare costs and the resulting fiscal pressures could have
an impact.
Retiree health costs, not previously considered a long-term
liability for State and local governments, are now being
recognized as such in State and local financial statements.
Medicaid costs are an even larger piece of State budgets
and are driven by the same cost factors. States' ability to
fund pension costs in the future will be affected by these
other budgetary claims.
So in conclusion, although most State and local pension
plans are reasonably sound financially, the ability to maintain
current benefit levels will depend, at least in part, on the
extent of the fiscal challenges these governments face in the
decades to come.
Governments with underfunded plans today will be most
vulnerable to those pressures in the future, but all will have
to address the consequences of uncontrolled healthcare costs, a
challenge that is not the State and local government's alone,
in fact, but will call for leadership at the Federal level, as
well.
On that happy note, that concludes my statement, and I'd
like to ask that my written statement be included in the
record.
Senator Casey. It will be.
[The prepared statement of Ms. Bovbjerg appears in the
Submissions for the Record on page 78.]
Senator Casey. It will be. And I should note for the record
that all the written statements will be made part of the
record. I don't think I said that before.
I know we have a vote that's going to be starting shortly,
but I wanted to have both Senator Klobuchar and Representative
Brady offer their openings at this time, and then we'll proceed
from there.
Representative Brady.
OPENING STATEMENT OF HON. KEVIN BRADY, A U.S. REPRESENTATIVE
FROM TEXAS
Representative Brady. Thank you, Mr. Chairman. It's a
pleasure to join in welcoming the panel of witnesses appearing
before us today. I've had the pleasure of working through the
years with Ms. Bovbjerg on a number of Social Security issues,
and it's nice to see you again.
Retirement security of those covered by both public and
private pension plans is an important priority of policymakers,
and I appreciate Senator Casey's leadership in convening this
hearing.
Turning though to the situation faced by the beneficiaries
of pension plans today, there is an emerging threat to
retirement security,which is in the form of rapidly increasing
prices on oil and gasoline, which have also spilled into higher
prices for many food products, as well.
Retirees on these pension plans, especially those on fixed
incomes, are very vulnerable to such price spikes for basic
necessities. And I think Congress's failure to act to lower gas
prices in America threatens the retirement security of our
seniors, it erodes the buying power for the beneficiaries of
our pension plans, and it has become yet another obstacle to
improving our anemic savings rate here in America.
For example, seniors 65 and over devote about 10 percent of
their income to energy expenditures such as utilities, fuel,
and transportation. Since half of that is petroleum based,
steep increases in oil prices will seriously erode seniors'
living standards.
This year alone,oil prices have risen about 40 percent
already, with some predicting even higher price increases. The
oil price increase to date this year is equivalent to about 2
percent of seniors' income, a very significant amount
especially over such a short time span.
These higher energy costs leave retirees with less money to
cover other necessities, including food, and of course rising
food prices also reflect higher costs for fertilizer,
transportation, packaging, and our ethanol policies, among
other issues.
Congress should not sit idly by while oil prices go through
the roof undermining the retirement security of seniors as well
as Americans who are still in the workforce.
Congress should act to encourage more American production
of energy. Congress should permit the States to allow offshore
exploration and drilling for oil and natural gas if they wish
to do so. However, unfortunately the majority in the House and
Senate continue to block repeated attempts to facilitate more
American production of oil and natural gas.
I worry that this do-nothing and drill-nothing policy must
come to an end.
While many public Defined Benefit Plans have cost-of-living
adjustments, few private plans do. However, it is safe to say
that soaring oil prices and associated increases in food have
far outstripped all of these cost-of-living adjustments. The
result is an erosion in the standard of living.
And in conclusion, it is also likely that higher oil prices
will have a significant negative impact on the returns of both
public and private pension funds, as well as other retirement
investments in coming years.
With a number of experts predicting relatively low returns
on equity investments in the future, workers and retirees may
be hit with lower than expected balances in their other
retirement investments as well. This makes Congress's failure
to act on America's energy production all the more inexcusable.
This is an issue that continues to face this Congress.
I am hopeful that at some point, sooner rather than later,
we will have some straight up or down votes on production in
America in measures that both Republicans and Democrats can
support together.
Thank you, Chairman.
Senator Casey. Thank you, Representative Brady.
Senator Klobuchar.
OPENING STATEMENT OF HON. AMY KLOBUCHAR, A U.S. SENATOR FROM
MINNESOTA
Senator Klobuchar. Well thank you so much, Senator Casey,
and thank you for holding this very important hearing.
As we face tough economic times I think the subject for
this hearing becomes more and more important. We see families
across the United States who are stretched by rising prices in
every direction, whether it is gas prices or the cost of health
care, or their housing prices, and what has been happening is
that the savings rate has been hovering around zero.
I do not think I have to tell our experts this, but when
you look at what has happened the last say 8 years where the
average American family's wages have gone down $1000 a year and
their expenditures have increased about something like $3000 to
$4000 a year, they have had a net loss, middle-class families,
of $5000 a year. It leaves very little for savings.
There is very little for them to fall back on, and that is
why I think that talking about how we can do a better job with
retirement plans is going to be key to our future.
I will tell you that I feel fortunate to come from a State
with a great Public Defined Benefit Retirement Plan. My mother
is a teacher, so I am well aware of this--a retired teacher.
There are three State-wide plans in Minnesota: the
Minnesota State Retirement System; the Public Employees
Retirement Association; and the Teachers Retirement
Association. They are well funded and have an average funding
ratio of 88 percent.
This money helps support over \1/2\ million Minnesotans'
plans for their future. Workers that retire without adequate
income, or cannot retire because of a lack of savings, face
tough choices at a time when they should actually be able to
reap the benefits of their work.
More and more we are seeing workers living paycheck to
paycheck putting nothing aside. And without sustainable
retirement--what I am concerned about is that it is my
daughter, who is now 13 years old, who will end up suffering
because we are not planning ahead for our future.
I know it is very important in the public sector, but I
also think that we can take some lessons from this and apply
them to the private sector.
And then finally, Mr. Neff, I am sure as this hearing goes
on I hope that we discuss some of the benefits from having
investments in communities and business development. In
Minnesota State Retirement Funds invest $1 billion each year in
the growth and expansion of our businesses, like 3M and Target,
and MedTronic, and General Mills, and Hormel. If you can't
invest in Spam, what can you invest in?
So anyway, I just think that that aspect of this, in
addition to the importance for individual families, of what
this means to have these investments made in your own
businesses in your own country is very important as well. So
thank you very much for being part of this panel.
Senator Casey. Thank you, Senator Klobuchar.
We are joined this morning by the real Chairman of this
Committee, not just the Chairman-for-today, Senator Schumer
from the Great State of New York. Thank you, Senator.
OPENING STATEMENT OF HON. CHARLES E. SCHUMER, CHAIRMAN, A U.S.
SENATOR FROM NEW YORK
Chairman Schumer. Well thank you. And first I want to thank
you, Bob Casey, for holding this hearing. There are very few
Senators who are as much in touch with the needs of average
folks than Bob Casey. It has been true throughout his whole
career and has certainly been true here in the Senate where he
is one of our most powerful voices.
That is why it is so appropriate that he is chairing the
hearing of the JEC on pensions, and on public pension plans,
because we have two conflicting things happening.
The average person, whether they be a public worker or a
private worker, is caught in sort of the pincers of two things.
One is, people live much longer. That's the bottom line.
Average life expectancy keeps going up. That is a tribute to
this country. With all the complaints about the health care
system, we cannot forget the good. When I was a little boy I
had a great grandmother who was 82, and the kids would come on
their bikes in our neighborhood and say: come to Schumer's
house and see the oldest lady in the world, because no one had
ever seen anybody 82 years old. Now, praise God, my dad is 85.
My mom is 80. And they are driving around and playing golf. So
it shows you how the world has changed. But that means people's
pensions are more and more important. It covers a greater and
greater portion of their life span.
And second, the average person does not have the buying
power they once had. So the ability to save, the ability to put
things away on your own, are declining. The great study of
Elizabeth Warren of Harvard Law School showed that in 2001 the
average worker's income, average family's income, rather, was
$48,000. It had gone down to $47,000 by 2007. That is before
this recession. So that was during the prosperity where we all
see those large macro numbers.
The middle class actually went down a little bit, the
median. But it is much worse than that. Buying power went down
to $41,000 because wage increases were not keeping up with
inflation. And if you had a child in college, it went down to
$39,000 because tuition is both so expensive and the increase
was so great.
So you put that altogether and pensions are more and more
important and need more and more discussion. That is why this
hearing is so timely. I just, as Chair of the Committee, want
to thank Senator Casey for suggesting and putting together the
hearing, and I think it is going to influence not just those of
us on the JEC, but the entire Senate as we look into the new
world we face and try to make the average middle class person's
life a little bit better, both while they are working and in
retirement.
[The prepared statement of Senator Schumer appears in the
Submissions for the Record on page 39.]
Senator Casey. Mr. Chairman, thank you very much for that
perspective, and also for allowing us to have a hearing like
this.
This is an issue that would not get this kind of attention
were it not for the work of this Committee, and for the
leadership of Senator Schumer. We are grateful for that.
We have a vote going on, so we are going to take a short
break, as they say on television, but we hope it is about 10
minutes for me to get over there and get back. It is only one
vote, I guess, so it should not be too long. That would give
our witnesses a chance to breathe before the hours of
questioning ahead of you.
[Laughter.]
Senator Casey. We hope it is only maybe 2 hours or less,
but we will return here as fast as we can and resume the
hearing. Representative Brady, I do not know if you will be
able to join us after this break, but we are grateful for your
presence here. Thank you.
The hearing is adjourned for about 10 minutes.
[Recess.]
Senator Casey [presiding.] We will resume the hearing. I
wanted to thank everyone for their indulgence while I ran to
vote. I tried to keep it in the time window.
I think what we will do is we will go to questions now for
all of our witnesses. I and Representative Brady might have
questions for one particular witness, or we might move around,
but we will try to keep it as free-flowing as possible.
We do not have tremendous time constraints, but I want to
be cognizant of the Congressman's time, as well as the
witnesses'. So we will try to keep it to 1 hour, if that is
possible.
Let me start with Mr. Pryor. I wanted to note in
particular, based upon your own experience, not just on the
more technical matters we're talking about here, but just the
human dimensions of this challenge and the reality for those
who are in public safety positions, whether it is a fire
fighter or police officer.
I noted at the very beginning of your testimony, and I made
a note of it after I heard you say it, you talked about,
``healing our bodies,'' meaning fire fighters.
Could you talk about that just for a moment in terms of
that before we get lost in the technical jargon? I think it is
important to note that.
Mr. Pryor. Sure. Our occupation, as most of you know--I
think basically people know what firefighters do--it is a very
strenuous occupation. Not only are you doing heavy lifting and
doing sort of consistent arduous activities, you are also doing
them at unexpected times. You are doing them when you have just
woken up in the middle of the night and trying to lift somebody
out of a house or something, just does not bode well for good
ergonomics.
It is a very hard occupation on your body is what I am
trying to say. And we have a very high rate of people that have
bad backs, shoulders, knees--you know, I cannot think of too
many people that actually retire healthy. It is not a matter of
who retires sick, it is who retires healthy.
It does not happen very often. These are not people that
can go out and get another job doing something of a similar
nature. A retirement they can look forward to and not have to
push themselves to the limit, and to be able to spend time with
their grandchildren and their families and be able to live in
the same house that they have had over the years is very
important to my members.
But what is really important to them is that they do not
have to go out and try and earn a living after they have
retired because they have an insufficient income. They want to
retire and stay retired.
That includes a pension benefit, and that includes health
care, which is also very important. Of course they are going to
need long-term medical care after they retire. So we try and
make sure that those firefighters that do retire have a good
health plan that will provide them with benefits to take care
of those long-term injuries.
Senator Casey. Thank you. And I wanted to move to the other
area of your expertise, which is dealing with the mechanics of
Defined Benefit Plans.
Mr. Pryor. Sure.
Senator Casey. You are a trustee of one of the country's
largest plans, and you have a lot of experience at this. I
wanted to ask you about the investment opportunities that are
available to DB plans that may not be available to, or in some
cases are wholly inaccessible to individuals relying upon a
Defined Contribution Plan for their retirement security.
Describe in summary fashion in terms of the opportunities
that are available to your fund that might be not available or
are inaccessible to an individual, for example.
Mr. Pryor. The two examples that really come to mind are
private equity investments and real estate investments. We have
a--we pride ourselves in having long-term relationships with
quality managers.
And when we do invest with those managers, usually it is on
a very long-term basis, not just our relationship with those
managers, but also the actual investments that we buy into.
This can be seen in private equity with startup mezzanine
financing, with buyouts. This can be seen in real estate where
we have some holdings where we literally keep on for decades.
And it gives us the opportunity to buy or sell in market cycles
that are advantageous to us.
So not only are we holding these for a long time, but we
are also able to pick out good market timing opportunities and
be able to sell those off at the best time, or buy them at the
best time.
And I just do not know how that could be done with any
other kind of Defined Contribution plan. The investment
opportunities in the alternative assets and real estate just
are not the same, in the same universe when you are involved in
a Defined Contribution versus a Defined Benefit Plan.
Senator Casey. Thank you. And I am going to move to Mr.
Neff only because--or to other witnesses who will not be
ignored by me, but I want to try to keep it at 5 minutes at a
time. Representative Brady will go about 5, and then we will
alternate.
But Mr. Neff, I wanted to zero in on something that you and
others have raised, but you in particular because of your own
experience in the private sector, about this aspect of the
question: the utilization by venture capital, utilizing that
revenue to nurture innovation, to foster job creation, to
actually contribute to the economy, which is often not
emphasized enough.
I was looking at Pennsylvania alone. Venture-backed
companies in Pennsylvania employ nearly 700,000 people and
these are in high-quality, high-paying jobs. Can you discuss
the role that pension funding plays in your own world, your own
Fund's ability to promote new technology and business and
therefore generate jobs for Pennsylvania, and even beyond
Pennsylvania?
Mr. Neff. Absolutely. As I mentioned earlier in my
testimony, approximately 75 percent of our committed funds come
from public pension funds, including the two leading funds in
Pennsylvania, the School Teachers' Fund, and the State Employee
Retirement Fund, PSERS and SERS. PSERS has been one of our led
investors since our inception.
So while on the one hand we are helping to provide
retirement benefits for school teachers and others who are
employed by the State or local districts, we are taking a tiny
slice of that asset pool and employing it directly into startup
companies and early stage companies exclusively in the region.
Our fund is particularly regionally focused in the Mid
Atlantic, and a significant portion of our investment activity
is in Pennsylvania.
I think we have over 20 portfolio companies now in
Pennsylvania. And these companies are investing in innovative
new drug technologies for a variety of diseases. They are
investing in ground-breaking medical devices. They are
investing in innovative health-care services. And they are
investing in clinical diagnostics technologies that allow both
providers and patients to get appropriate care for the disease
conditions that they have.
In a typical startup company, we are employing not your
average employee in the State with a $27-$28,000-wage level,
but we are typically employing scientists and other highly
skilled professionals who have much more typically wage levels
in the $75-$80,000-a-year level. And those employees, in turn,
typically spend upwards of $200-$250,000 per employee per year
in their research and investment activity in the early stages
of these companies.
I think if I probably cut all of our companies across the
board, it would look something like that. So this is very high-
impact investment, if you will, wherever it happens.
We are agnostic as to the source of the research that forms
one of our companies. It can come from Singapore; it can come
from Sweden, but for the talent that is used to actually
commercialize that technology we find a motherlode in our
particular region, and those are the people that we can pull
together to put into a company to actually make that investment
work.
I hope that is responsive.
Senator Casey. And it is all life sciences, which has the
double benefit of that you are not only creating, or helping to
create high-paying jobs, but you are also fostering the curing
of diseases and helping our health-care system. So it is a
fascinating combination of, I think, positive benefits.
I am now 4 minutes over my time, so the Congressman has at
least 9 minutes, and I will come back. Thank you.
Representative Brady. I will try not to take that much
time, Senator. These questions deserve deliberation.
This is a great panel. I appreciate you very much. Mr.
Pryor, you are right; the experience of retirement plans when
they deal with special occupations like firefighters presents a
challenge.
Two years ago from my seat on Ways and Means we were able,
working across the aisle with Congressman Gene Green, to change
the drop formula for the penalties for firefighters and other
police using that pension plan because, in fact, their bodies
wore out before they reached the standard retirement level, and
it sort of points out how we need to be flexible in these
formulas as we address retirement benefits.
Dr. Weller, in your written testimony you praised Defined
Benefit Plans for their ability to make alternative high-risk
investments. For example, in futures and venture capital funds.
According to an article published just last week in the
Washington Post, State and local government pension funds have
collectively become the largest investors in the oil futures
markets. By speculating on higher oil prices, the pension funds
have earned spectacular returns.
For example, California's Employee Retirement Fund earned a
return of more than 68 percent on an initial investment of $1.1
billion in oil futures, just during the last 12 months.
However some of my colleagues, including the Speaker of the
House, Nancy Pelosi, have blamed much of the recent increase in
gasoline prices on such speculation. Apparently, big
speculators who were driving up gas prices turn out to be our
State and local government workers and retirees whose pension
plans are investing for a high return.
In Congress, some have proposed closing the so-called swaps
loophole through which pension funds have invested in oil
futures.
Dr. Weller, if such legislation were enacted, would it have
the unintended consequence of diminishing the ability of
pension funds to earn high returns from alternative investments
that you have praised?
Dr. Weller. Well let me talk a little bit about
commodities' speculation in oil prices. I think clearly when
you look at what is happening to American families, they are
caught between declining incomes and rapidly rising prices, and
that is certainly worthy of consideration.
However, one of the problems we see when it comes to price
increases is the sharp volatility in oil prices. If oil prices
had always been--or gasoline prices--at $4 a barrel--at $4 a
gallon--we probably would not have these discussions, but
because they have promptly risen, that is what concerns us.
So the problem is, if you are looking at the swings in the
commodities markets, you have got to be very careful in terms
of regulating those markets. If you say, OK, will we completely
shut off the ability for large investors who bring a lot of
liquidity to the market--you are probably doing more harm than
good, because you are ultimately increasing the volatility of
those prices.
The other side is that if you have some of the proposed
regulations, you probably have very little effect in terms of
overall driving speculation or participants in a market.
So, I think where you want to go is more transparency of
some of these speculations, but I think ultimately you have got
to touch this very carefully, because the problem that we are
concerned with is the big price swings in commodities.
And I think closing some of these loopholes could have
adverse consequences in the sense that they could increase
volatility by taking out the big players in a market who have a
long-term outlook in the market, and who can ultimately provide
the liquidity that to some degree actually does tend to reduce
the volatility of the market, and particularly the public
sector pension plans tend to be somewhat followers rather than
leaders in the commodity market according to studies by the
CFTC.
Representative Brady. So the impact, if I heard you
correctly, in addition to the market--the impact on pension
funds, if we limited their ability to make these investments,
would lower their return by having forced them to switch to
other perhaps less----
Dr. Weller. Well the plans are investing in these things,
in commodities, for inflation hedges and other things. Their
rates of return on commodity investments are somewhat
uncorrelated with other investments, and it is a
diversification strategy that is the benefit of large pension
plans and large institutional investments.
Representative Brady. But is it your----
Dr. Weller. So reducing their ability to do that would
increase the risk exposure in the short run, or in the long
run--it remains a little bit to be seen--but presumably, it
would reduce their rate of return. But it remains to be seen
how much, and honestly, I am not prepared to give you an
estimate on that.
Representative Brady. I will take that as a ``probably
yes.''
Conversely, do any of the panelists take the position that
speculation by these pension plans have driven up the price of
oil? Do any panelists take that position?
Mr. Pryor. I would not.
Representative Brady. Great. Thank you, Mr. Chairman. I
have got another question, but I will hit it after you are
completed.
Senator Casey. Thank you very much, Congressman.
I am going to try to get back to our first two, but I do
want to go in order so we are covering everyone.
Dr. Weller, I wanted to ask you about the assertion that I
and others have made here today about better annual return for
Defined Benefit Plans as opposed to Defined Contribution Plans:
ability to pool risk, access to professional management, lower
administrative costs, ability to invest in alternative asset
classes without posing risk.
All of that, you know the list. But can you talk for a
moment about two things? One is, in whatever order you want,
but one is the criteria that you outlined and how important
that is that Defined Benefit Plans meet that criteria for
performance and for the health of a fund.
But also, in particular, in a similar way that I asked Mr.
Pryor about, what are some specific opportunities that are
available to DB plans that are unavailable to an individual
based upon the work that you have done--especially when you
think about the long term?
Dr. Weller. I think the overall--when you look at the rate
of return--that is obviously an outcome measure. I think when
we look at the inputs, you do have risk pooling, especially the
mortality risk pooling is particular important.
Again, let me reiterate what I said in my testimony. When
you have a Defined Contribution Plan, as an individual, you
have to plan for the maximum possible life span. You don't want
to run out of money. In most plans, 95 percent of people do not
annuitize their income. So if you want to manage your own
lifetime, your own lifetime income, you have got to basically
over-save, which you do not have to do in a DB Plan.
That does actually add a substantial cost in a Defined
Contribution side.
The other part is economies of scale. I think whatever I
have studied over my 20 years in financial markets, economies
of scale do play a substantial role. They allow, by having
pooled assets, they allow plans to reduce the cost. Regardless,
even if they have the same investment profile as an individual
with their 401K Plan, the fact that they are larger, that you
need to collect the same information, whether you invest
$10,000 in a company, or $100 million in a company, that can
reduce substantially costs.
And as I said, the asset management fees are about 25 basis
points for a DB Plan. They are substantially higher for a DC
plan. Over a 40-year period of 1 percentage point difference
reduces, roughly speaking reduces your savings by about 25 to
30 percent. That is substantially lower retirement savings. So
that is one thing.
And then finally, the ability to diversify assets is
certainly important. That is something that ultimately is
only--it plays a little bit into the economies of scale
argument. If your portfolio is $40,000, you do not want to
really start speculating on currencies or commodities.
But if you are a large pension plan, you want to diversify
across all potential asset classes, including commodities and
currencies. And I think that would be--that adds to an improved
risk and return profile in the whole mix.
So I would say probably risk pooling first, economies of
scale second, and ultimately the diversification third. And
especially diversification is a particularly important aspect
here. The interaction between diversification and DB plan, with
a very long-term horizon, basically an infinite time horizon
for the public sector pension plans.
Senator Casey. Tell me a little bit about--and I am going
to respond to some of the points that Representative Brady
raised about hedge funds and the interplay in the commodities
market.
Talk about that for a moment--we know that DB Plans do
invest in hedge funds, often hedging other investments. If they
are doing commodities' hedging, it is usually a small percent
of their overall investments.
Talk about that for a moment, if you agree with that, and
amplify or expand on that.
Dr. Weller. Well I think when it comes to hedge funds they
are part of an overall diversification strategy, as is common
for a lot of institutional investors, and I know my two
colleagues to my right can probably speak a little bit more in
terms of how that interacts with their plans, or the world that
they know.
I think the issues we face with hedge funds, though, are
hedge fund issues that have nothing to do with public sector
pension plans. That is that just simply they are a black box in
many cases.
They are not that well regulated. We often do not know
exactly who are the investors in those, and I think that is--
but that is a separate issue. I think that is an issue that is
something that I think all institutional investors should be
concerned about. It is a financial stability issue generally in
terms of increasing transparency and regulatory oversight over
hedge funds.
But I do not think it has anything to do with public sector
pension plans investing in hedge funds as part of their overall
diversification strategy.
Senator Casey. This is obviously an important issue for the
debate on energy and how we deal with the current economic
crisis, which a lot of it is centered on the price of gasoline.
I have talked a lot about the issue of speculation and that
there has to be more transparency, not just in the context of
larger investors, but just generally in the area of
speculation. But there are some real conflicts on the issue.
But I do think, in the context of the debate we are having
in Washington, the one area where there is some common ground
between Democrats and Republicans is on this issue of
speculation. It is probably the only area where there is common
ground right now, other than maybe some tax issues.
So we need to explore it more than we have today. But I
wanted to, before my time runs out for this round, I wanted to
ask you. Sometimes in this debate we talk about let's just look
at this from the perspective of a taxpayer. Let's set aside
beneficiaries. Let's set aside government. Let's set aside the
impact that DB plans can have on the economy overall--
taxpayers.
Because in my State of Pennsylvania, one of the real
challenges we will face in the State is taxpayers saying: Well,
look, do you mean to tell me I've got to pay more to support
these pension plans? Because there is obviously a taxpayer role
to play here.
And that is a reality we have got to deal with. It would be
nice if the world were different, but taxpayers have a very low
tolerance right now for paying more on a number of fronts, and
one of them that is around the corner, maybe even if gas prices
go down or stabilize, when as a country we do something about
health care, which we have not yet--Congress has not; the
Administration has not--we, both parties bear some
responsibility here, but around the corner in Pennsylvania and
a lot of other States, this question of the taxpayer role in
this equation is going to become--to say it is going to become
prominent is an understatement.
So just from the perspective of a taxpayer, when you were
giving your opening--during your opening statement you talked
about ``efficient allocation of taxpayer dollars.'' Talk to us
about that, in particular, and how taxpayers when they look at
this issue, what you think they should know about how DB Plans
play into their lives by efficiently allocating taxpayer
dollars.
I know it is a broad question, but do your best in a couple
of minutes.
Dr. Weller. I will try to keep it short.
I think for taxpayers--and often when you ultimately
explain it, it becomes clearer--but taxpayers want to have
firefighters who are willing to go into a burning building and
save people. They want to have police officers who take public
safety seriously.
They want to have qualified and skilled teachers educating
their children for the jobs of the future. And in order to both
recruit very skilled and courageous people, but also retain
them, you do have to offer in the public sector Defined Benefit
Pension Plans, a good benefit.
Then the question becomes, OK, what's the best way of
offering that benefit? So, far, defined benefit public-sector
pension plans is the biggest bang for the buck.
In terms of offering a solid retirement benefit that not
only offers retirement income for life, but also offers
survivorship benefits and disability benefits, as we've heard,
are particularly important for the hazardous occupations for
the public safety occupations.
So if you, as a taxpayer, are concerned with public safety,
with a good education quality in your State, and in other good
public services, you ultimately have to agree that you have to
pay a good salary, but also overall, offer a good benefits
package, including retirement and healthcare benefits.
Then the question becomes, OK, how do you get to that
point? How do you deliver that benefit to the public service
employees at the lowest cost to the taxpayer.
A large-scale pooled pension plan in the public sector is
by far the best way of doing it.
Senator Casey. Thank you. I have some follow-up, but I want
to give the Congressman another chance. I violated my minutes
rule. Thank you.
Representative Brady. Thank you, Mr. Chairman. Even though
high gas prices and food prices are eroding the benefits that
retirees enjoy from their pension plans, the take-away from
this hearing seems to be that by most measures--at least within
the State and local government pension plans--that they are
adequately funded over the next two decades or so.
But turning to the question the Senator raised about
healthcare, before 2005 the Government Accounting Standards
Board didn't require State and local governments to calculate
and disclose their liabilities for retiree healthcare benefits.
By the end of this year, all State and local governments
will be required to make this disclosure in their financial
statements.
In January, the General Accountability Office estimated
that the unfunded liabilities of State and local governments
for retiree healthcare benefits was between $600 billion and
$1.6 trillion.
Ms. Bovbjerg, just starting with you, have State and local
governments generated these huge liabilities largely because
they did not fund healthcare benefits over time, as they did
for retiree pension benefits?
Ms. Bovbjerg. It's a whole different model, Mr. Brady, that
pensions traditionally have been pre-funded with contributions.
I don't know if anyone here pointed this out, but probably two-
thirds of the assets in a pension fund are from investment
returns, not from contributions.
In the retiree health area, it was traditionally considered
part of employee health benefits, so it was treated much the
same way that health insurance for active employees was
treated, so although there are a few governments out there who
have prefunded retiree health to some extent, virtually none of
them have fully done that.
And we offered that number, but that's actually not our
estimate. We talked to all these different people who thought
about this, and we give the resulting range of anywhere from
$600 billion to over a trillion, because States have not yet
been required to report this. This is just starting to come out
now.
Representative Brady. So this is just the early estimate of
what it may turn out to be?
Ms. Bovbjerg. That's right. The reports are required in the
fiscal year starting after December 2007, so just now, just now
you'll start to get the end of this period.
You'll start to get reports on what these liabilities look
like. When we talked with rating agencies and with States about
this, the general view was that no one's going to rush to try
to fund all of this right away because it's going to be a
pretty big number in each case.
But there seems to be a consensus among the rating agencies
and among States, that having a plan is important, so we'll
start to see some of these plans emerge, as well.
We have work just now underway for the Committee on Aging
to look at what actually are States going to do in dealing with
the retiree health liability. When we did this earlier work,
they were still trying to grapple with just what are the
numbers; how big a liability might this be?
Representative Brady. Well, isn't it critical to States and
local governments, to begin now to address those liabilities
because, as Senator Casey pointed out, taxpayers end up
covering those liabilities. There's rarely cuts in public
retiree healthcare benefits, it's a huge number.
And just the thought that local taxpayers would pay more to
support benefits when, in fact, their private benefits are
oftentimes lower than that, when their savings rate is lower,
as well, seems to be yet another hickey that the public simply
can't make room for in their family budgets.
Are there States that you know of that are addressing, or
local governments that are really addressing--have drawn up a
plan or are following a plan to eliminate those liabilities?
There are some that have plans. For example, some have
issued bonds, so essentially, they've borrowed to finance the
liability. They kind of locked themselves, and we'll see
whether that was a good decision or not a good decision.
I think the jury is still out on that. There will be States
that will just do what they can to start the process of
prefunding and fund up. And you see pockets of places that are
doing that, often at the county level.
And you will see some that will reduce benefits or ask for
greater employee contributions to those benefits.
Retiree health benefits are not protected legally the way
the pension benefits are in State and local government, so
that's a vulnerability for public employees--for retirees.
They really need to deal with this. They need to have a
plan because States, in our estimate, have about a decade
before healthcare costs are going to eat them alive, not just
retiree health, but active employee health, Medicaid.
That's why we've called for the whole public sector,
including the Federal Government to really give attention to
the issue of healthcare costs and how we can address it.
The States won't be able to take that on, on their own.
Representative Brady. Legally, these plans may not be
protected, but politically--in the real sense--they are in a
way.
Other panelists, any other thoughts on unfunded liabilities
in healthcare?
Mr. Pryor. In our county, which is currently a pay-as-you-
go system, for retiree healthcare funded by the county of Los
Angeles, we're considering funding options.
We really want to take advantage of the real strength of
defined benefit pension plans and that is to use prefunding, to
use investment income to pay for a benefit.
Now, the problem with retiree healthcare, of course, is the
rapid escalation of the cost of providing this healthcare.
You know, we know what general cost of living is within a
small parameter. We know what it's going to be for our
retirees, to preserve their purchasing power.
We don't know what healthcare is going to cost in the next
20 years. And what level do we have to fund retiree healthcare
to be able to keep a good retiree healthcare program?
You know, we can still fund it. We can still provide, you
know, with excess money--with bonds--whatever we decide to do.
We can start this asset pool going, but we're very careful
about predicting our liabilities; we're very careful about
making sure our liabilities are matched with contributions in
the pension world.
You can't do that for retiree healthcare, but again, we're
going to try; we're going to put our excess earnings, not from
the pension system, but we're going to be putting funds and
possibly bonds together to start an asset pool and see if we
can start meeting those obligations with investment income.
Representative Brady. So, the ability to invest and get
higher returns is very important.
Mr. Pryor. Absolutely.
Representative Brady. Not just for the pension side, but
the healthcare side, as well. I do think--go ahead. I'm sorry.
Mr. Pryor. It's using what we've learned in the defined
benefit pension world, and trying to use that as a way to fix
the funding of retiree healthcare.
Representative Brady. The two biggest questions that I get
at home in Texas, from State and local governments, is one, how
can we afford the rising cost of healthcare, and second, how
much next year do I budget for gasoline? What's the price at
the pump.
Now this year, I budgeted $3.50 a gallon. Is it $5 next
year? Is it $6 next year? Law enforcement asks me that; school
boards and districts ask me that; every local government asks
me that, again, continuing the belief that at some point
Congress needs to act, the sooner the better.
Thank you, Mr. Chairman.
Senator Casey. Thank you very much. I wanted to finally get
to the other end of the table to Barbara Bovbjerg.
In particular, I wanted to ask you about the--I know there
was--and I just made a note of it and didn't write down every
word you said, but when you talked in your opening about State
and local governments having enough money set aside, can you
just restate that--kind of where you see things right now in
terms of what State and local governments have set aside for
pension benefits going forward?
Ms. Bovbjerg. We looked at the sector of State and local
governments in the aggregate.
Senator Casey. Right.
Ms. Bovbjerg. And we used an 80-percent funding level. It's
a little different than in the private sector because they
governments are ongoing concerns.
And we found that the majority of the big plans have enough
money set aside, that as a sector, they actually look pretty
good. We did a little simulation model where we tried to look
at what would it really take to fund pension commitments for 40
years, and we found that it would take very little more than
what State and local governments are putting in right now, as a
percentage of pay.
I think they are putting in about 9 percent of pay now as
sector, and it would have to go up to 9.3 percent. So it all
seems very doable and very reasonable.
The caution is that there are other things going on out
there that are going to make claims on State and local
resources, but I think one of the messages we really wanted to
bring to Congress is that you do see in press coverage that
certain plans are very underfunded, really struggling to make
their payments, and that is true.
There are such plans out there, and some of them are very
big plans, but by and large, the sector is keeping up pretty
well with their required payments.
And that's a good thing because if you don't keep up, then
it gets harder and harder and harder and you lose the magic of
compound interest, the magic of the investment returns, and you
just get further and further behind.
But, as a sector, they seem to be doing reasonably well.
Senator Casey. I'll tell you, that's good news. In
Washington, if part of the message we send to the State and
local governments is you need to do a little more, that would
be sweet music to their ears. Usually Washington is saying,
you've got to do the whole thing, pal, get ready.
Ms. Bovbjerg. For some plans it's a little more; in other
plans, it's a lot more.
Senator Casey. I'm being a little cavalier.
I wanted to move to--as I said in my opening, I'd ask each
of you for specific recommendations, and we'll do that.
We're joined by Congressman Cummings, and I wanted to give
him a chance to do an opening now or to ask questions now, but
just as a preview to something that I want to do before we
leave is to ask each of you for your recommendations about what
the Congress should do.
We're elected to serve you; we're elected to serve
constituents across this country, and I think hearings should
not end without an action plan or at least the outlines of an
action plan of things that we must do here.
Sometimes the best thing Congress can do is get out of the
way or not get in the way, but sometimes there are specific
steps we can take legislatively or otherwise, or even just be
better advocates to help at the local and State level.
So I'd ask you for those recommendations, each of you,
before we leave here today, but also if you have more work to
do on them, or if you want to amplify or expound in the record
on those recommendations, we would not only invite that, but
encourage that.
But before we get to that segment, I know that both
Representative Brady might have more questions, but I wanted to
have Representative Cummings either present questions, or give
commentary.
Congressman, the floor is yours, and you have plenty of
time.
Representative Cummings. Thank you very much. Thank you all
for being with us.
Ms. Bovbjerg, I have a question about the interaction of
defined benefit pension plans and Social Security. When
employees are receiving more of their private pensions from
defined contribution plans, one assumedly should also raise the
payout rate from the traditional Social Security, rather than
trying to privatize part of it.
What's your opinion on this matter, and what would be the
respective pros and cons of partial privatization?
Ms. Bovbjerg. Well, as you know, we've done a lot of work
on Social Security and the different issues. One of the points
that I infer you're making is something that we've raised,
which is this concern about risk for individuals that, as we
move to a defined contribution world in the private sector,
would we then also move to a more defined contribution world in
our social insurance program, in Social Security?
And we think you'd really want to think about that before
doing so, because you don't want the same market conditions
that are affecting someone's 401(k) to also be affecting their
Social Security benefit. You want them to have a little more
diversity in their retirement income.
That said, we have also heard a number of proposals that
would create a separate savings mechanism. I testified a couple
of weeks ago on automatic IRAs and those sorts of things that
would offer people an ability to have some sort of savings
account, which is an ability that they have now, but would make
it easier for them to participate.
I know there are a number of proposals that would have a
mandatory savings account that would be separate from Social
Security. There is sort of this range of ways to think about
that.
But I would really encourage the Congress to think about
this as retirement income more broadly. Think about Social
Security, personal savings, and pensions all together, so that
we do not inadvertently do something that then has a pernicious
effect at the end of the day, at someone's retirement.
Representative Cummings. Mr. Pryor----
Mr. Pryor. Yes, sir.
Representive Cummings [continuing]. In the State of
Maryland over 133 parts of local governments participate in the
State's pension plan. Moreover as a whole, Maryland has $38.5
billion in pension funding as of May of 2008.
Maryland, unlike California, has a combined pension plan
rather than one that is divided amongst the various public
sectors such as CalStar.
In your opinion, is there a greater benefit to dividing
such plans based upon the various government sectors?
Mr. Pryor. I think as long as you have an employee pool
that shares similar needs in retirement, I think that you can
pool. I'm sure there are plenty of studies out there about the
size of a fund. You know, does it have to be $1 billion to $40
billion to fully take advantage of asset allocation and use all
those good things that I think Defined Benefit Pension Plans
use?
So I think you really have to look at the size of the fund
and look at whether that fund can appropriately diversify
rather than just look at employee pools. I think
administratively you can really--you can figure out what kind
of benefit and what kind of payment different employees are
going to have to pay.
But I think that asset pool needs to be an appropriate size
to give proper diversification, and my fund is almost the same
size as your Maryland fund and we find that we are nimble
enough, not so big that we don't take over a sector, but at the
same time we are able to hire staff and hire the right managers
to get us in the door on some quality investments.
Representative Cummings. Some people suggest replacing a
Defined Benefit Pension Plan with a Defined Contribution Plan
such as 401K. Currently the average 401K account has a balance
of less than $40,000 upon retirement.
As a firefighter do you think that that is enough money for
a typical public safety officer to retire?
Mr. Pryor. I think I have made my position very well known
in the State of California where I stand on this, and
frequently through a bullhorn and carrying a sign as I was
doing. I am horrified at the prospect of members switching to
Defined Contribution from a Defined Benefit Pension Plan.
We are doing it right. We have good investments. We have
solid plans that provide a good retirement for hardworking
people. Why change things?
These are plans that do not cost the taxpayer too much
money. They do not--you know, we are well-run plans. And I
think that when everything--you know, hearings like these, and
meetings like we have had in California when taxpayers, when
local government hear the advantages and the savings they get
from having these plans, and the doubling and tripling of
investment income, and benefits paid out to retirees, and how
this stimulates local economies and provides good quality
health care opportunities for our retirees, I think people
understand.
And they understand that the Defined Benefit Plans are the
way to go. The days of Defined Contribution Plans, you know,
trying to take over Defined Benefit Plans, I do not know where
that is going to go but I know how I feel about it, and I feel
very strongly that Defined Benefit Pension Plans are what our
public employees need, and we are here to protect those Defined
Benefit Plans.
Representative Cummings. Just one other question, Mr.
Chairman. I understand that firefighters--and I have dealt with
a lot of firefighters as a State Legislator----
Mr. Pryor. Yes, sir.
Representive Cummings [continuing]. And here in the
Congress--often retire many years before they are eligible for
Social Security. As a matter of fact I remember back when I was
in the State Legislature they were saying that research showed
that, sadly, firefighters quite often pass away within 5 or 6
years, which I found incredible, after retirement.
Mr. Pryor. Yes.
Representative Cummings. And so they retire before they are
eligible for Social Security, and many of them have serious
physical ailments in their retirement years stemming from
spending a long career in a demanding profession, and of course
inhaling all kinds of smoke, fumes, and what have you.
Are Defined Benefit Pension Plans able to better address
these kinds of issues?
Mr. Pryor. Yes. Eventually our bodies are going to break
from our job, and we realize this. Some sooner, some later;
some people are able to make it to 55, 56 years old. But we
have quite a few people that have to leave with just a couple
of years on the job because they have taken hazardous--you
know, solid injuries that require them to leave. They cannot do
arduous employment anymore.
Really, our Defined Benefit Plans act as the insurance
plan, act as the annuity for those people when they do have to
leave. And they can, you know, take time to find other
employment of a less arduous nature, and they have the
insurance of those benefit plans behind them.
And in the most extreme circumstance, and the most
unfortunate and one they have to deal with quite a bit, is the
death of a firefighter. That is, that it provides a survivor
benefit, a Defined Benefit Survivor Benefit for the families of
those people that are killed in the line of duty.
And in the situation you had said before, if this was just
a 401K account that is $40,000. How long does that last a
family of four? We have been told, well, you can purchase
insurance to back it up so we will be able to provide for those
survivors.
We cannot. We cannot find insurance to cover that kind of
benefit, that level of benefit, if somebody is killed in the
line of duty. It is not offered. People do not want to cover us
for those kinds of injuries.
So we have--and as I said in my testimony--a Defined
Benefit Pension Plan is a lot more to us than just a Pension.
It is also an insurance system that provides for us, that
provides for our family if we are killed or injured in the line
of duty.
Representative Cummings. Thank you, Mr. Chairman.
Mr. Pryor. Thank you, sir.
Senator Casey. Thank you very much, Congressman. I want to
thank you for your presence here today, your questions, and
your leadership on this issue. Also, for traveling all the way
across from the House to join us. We do not get over to see you
guys enough, and we are grateful for your presence here today.
Before we get to recommendations--and I will just go. We
will not call it a lightening round, but we will try to get to
everybody to make recommendations. And again you can add more
for the record.
But the Joint Economic Committee staff does a great job
with, among the many things they do, with charts. I forgot
earlier--and I did not need a staff member to remind me; I
actually reminded myself, which is rare in Congress; we can
actually think for ourselves once in awhile, right--but we have
two charts here I just wanted to quickly highlight for the
record.
Nathan, maybe you can put them up, just because I know the
work that went into them. The first one--and actually the one I
wanted to highlight more was this one we have up there.
The Defined Contribution Plans are nearly four times as
expensive to administer than Defined Benefit Plans. I think
that is important to point out because sometimes when arguments
are made in these kinds of debates where there is something
new, a different road to take, a different direction, some kind
of whiz bang different way to do things, they always preach it
is more efficient, it gets better results, all of those
arguments.
[The above chart entitled, ``Defined Contribution Plans Are
Nearly Four Times as Expensive To Administer'' appears in the
Submissions for the Record on page 48.]
In this context I think it is very important to point out
the differential here between the Defined Benefit--the public
plans, their administrative costs, versus the Defined
Contribution costs. This is little known information. It's
probably never been in a headline, never been on a news show,
but it is important to point out.
The second chart just does a very basic calculation, but
Defined Benefit Plans are providing better income security for
retirees. We have made this argument, this assertion, but the
chart here is based upon $100 invested in a DB plan paying
almost $200 more over time, the long run so to speak, over 25
years, than the same money in a Defined Contribution Plan. The
green line going upward is the Defined Benefit versus Defined
Contribution.
[The chart entitled, ``Defined Benefit Plans Provide Better
Income Security for Retirees'' appears in the Submissions for
the Record on page 49.]
I wanted to make sure we saw that graphically because it
helps to have some graphic presentations of some of these
concepts.
But let's move to recommendations, and then we will wrap
up. We can go in any order. We can start with Mr. Pryor, or
start on the other end with Ms. Bovbjerg. If someone has to run
out the door, you can go first.
Ms. Bovbjerg. Well I can go first because, as you know,
from GAO if I had recommendations in this area you would have
already seen them in print.
Senator Casey. Right.
Ms. Bovbjerg. With regard to public plans, the number of
States that provide Defined Benefit Plans now is the same that
it was 10 years ago. The mix changes a little bit with the
hybrids, but it is pretty stable.
If your goal is to preserve Defined Benefits in the public
sector, I do not think there is much to be done there. Now I am
not in the trenches the way some of the other people here are,
particularly Mr. Pryor on this panel, who might have a
different perception about the debate in Los Angeles.
On the private sector side, it is a much different
situation. As you know, Defined Benefit Plans are disappearing.
We are not seeing a lot of new Defined Benefit Plans.
We do have work coming out very soon on the dynamic of
frozen plans that Mr. Pomeroy raised earlier. I think that will
be some important work that is going to provide a foundation
for us to think more about what really needs to be done on that
end of employee benefits.
We have also been asked to start work on looking at what
would be a really good hybrid plan, a combination of the best
characteristics of Defined Benefit Plans and the best
characteristics of Defined Contribution Plans.
That is something that we were asked to look at some time
ago when we convened a Comptroller General's Forum on Defined
Benefit Security, and we are happy to be able to start that
work.
So we will stay in touch with you on this issue, and I hope
we will have recommendations for you later.
Senator Casey. Thank you very much. I appreciate that, and
I appreciate your work and your scholarship and also your
contribution here on your testimony. Thank you, very much.
Ms. Bovbjerg. Thank you, Senator.
Senator Casey. Doctor.
Dr. Weller. Well I believe a series of publications by the
National Association of State Retirement Administrators and the
National Council on Teacher Retirement says it all. The public
sector plans are getting it right.
So I think they serve as a model in terms of how we can
achieve retirement security and allow hard-working Americans to
achieve a middle class lifestyle in retirement after a lifetime
of hard work.
Having said that, I would say that we can use this model
and the lessons from public sector plans to improve, to
ultimately improve retirement income security in the private
sector.
I think much of the discussion focuses there on how we can
implement a number of those features that are important in
Defined Benefit Plans into Defined Contribution Plans. That
goes into automatic enrollment, automatic default investments,
life cycle funds, and model investment funds. Those kinds of
things are already on the table, and I think we can do more.
I think the big question that still needs to be addressed
is how we can ultimately lower the costs, the fees on Defined
Contribution Plans. That is a tall order.
The other part is also--and Barbara already mentioned
this--looking at, and it has been mentioned a number of times
in this hearing today, on why is it that in particular single
employer Defined Benefit Plans have disappeared very rapidly in
the last few years.
Multi-employer plans, which were somewhat similar to the
public sector pension plans, have actually remained relatively
stable. And what can be done to promote multi-employer Taft-
Hartley type pension plans in the private sector, which are
somewhat similar to the public sector plans, as a particular
model for private sector retirement benefit security.
I think one subaspect of that is I think we need to look at
accounting rule changes on the increased uncertainty in terms
of contribution volatility for the plan sponsors and what that
has done in terms of plan sponsorship and the maintenance of
those plans.
As I said, I think the public sector plans and the State
and local governments are actually getting it right. They are
well regulated through State and local government regulations.
I think they can serve as a model as lessons for what we
can do both in the Defined Benefit side and the Defined
Contribution side in the private sector, and I think we need to
draw out those lessons and implement them in the future.
Senator Casey. Doctor, is there anything--and this is for
today or if you want to amplify the record--but is there
anything that you think Congress should do in the near-term on
this?
Dr. Weller. I think on defined----
Senator Casey. And I am saying as opposed to a lot of the
legislating in this area obviously will be done at the State
level as well.
Dr. Weller. I think on the public sector side, as I said,
they are well governed. That shows up in their asset
allocations and their overall performance. I do not think that
there is any role really for the Federal Government here. The
States are doing it right. They are closer to those issues.
I think however on the private sector DB side, the
lessons--again of the lessons that I think it is important to
learn is regular contributions matter. I mean, that is one
thing that makes the public sector plans different from the
private sector plans.
There are regular employee contributions for instance going
into those plans. And that is something that you definitely
could pick up for the private sector side.
Again, on the multi-employer private sector side, it
already exists because it is often collectively bargained
contributions from the employer. But I think that is an
important lesson.
And then the other part is the accounting rule differences
between the public sector and the private sector, which seem to
have been harmful the last few years to the private sector
side.
Senator Casey. Thank you very much.
Mr. Neff.
Mr. Neff. Mr. Chairman, I think we have heard today that on
balance the Defined Benefit Retirement System works. It works
well for beneficiaries. It works well for taxpayers. And it has
worked well for the economy.
The Defined Contribution System I don't think we can say
has worked nearly so well in those three categories. So
relative to recommendations, I would say please do nothing that
will further encourage the disintermediation of funds from the
Defined Benefit System to the Defined Contribution System.
From where I sit as a venture capital partner, putting to
work a very small slice of the Defined Benefit pool of capital,
I would say that this is the only pool of capital that is
consistently and reliably available to those of us who are
company builders, company creators with a long-term, multi-
decade horizon.
And the characteristics of the Defined Contribution System
are completely anathema to that long-term investment in the
economy. So this may be a very good place to do nothing as it
relates to this system.
Senator Casey. We appreciate your candor. Thank you very
much. I appreciate your testimony today and making the trip to
be with us today and anything that you or the other witnesses
want to add to the record, of course, you could.
We will conclude now with Mr. Pryor. Thank you for having
travelled the longest.
Mr. Pryor. Thank you. I definitely had the risk of having
my thunder stolen, which apparently has happened by Mr. Weller,
but I will try and rephrase a little bit.
That is, that to me a huge step forward is going to be the
resuscitation of Defined Benefit Pension Plans in the private
sector. These are good pension plans that provide for a quality
income, health care upon retirement after a long career, and we
need to put that back into the economy in the United States.
Because not only is it good for the owners of these companies
who will have-as taxpayers have--a quality pension that is
affordable for those companies, but also it is going to
hopefully lead to recruitment and retention and provide for
their own needs.
Also we see the defined benefit impact on the economy as a
whole, and how these pension dollars are reinvested back into
the economy. I think that that is something that the Federal
Government and State Government needs to concentrate their
efforts on again revitalizing these private defined benefit
pension plans and realize what a big give-back those plans are
to local economies.
Maybe when we can start getting more research and have more
hearings like these to discuss the impact of Defined Benefit
Pension Plans, maybe more people will catch on.
So I think my recommendation is to keep doing what we are
doing here today. Thank you, sir.
Senator Casey. Thank you very much. And thanks for your
testimony.
Congressman Cummings.
Representative Cummings. Just one question.
Mr. Neff, I was listening to your response to the Chairman,
and I was thinking that in Maryland we ranked fifth among
States in bioscience venture capital investment between 2002
and 2007, and that amounted to about $2 billion invested.
Moreover, there were sectors of the economy that rely on
venture capital investment that would be--I'm just trying to
figure out, if the venture capital funds were to dry up, what
sectors would be most affected? And would it affect all of
this--I am concerned about my constituents.
Mr. Neff. Sure. It is an excellent question. As I testified
earlier, approximately 42 percent of the entire venture capital
industry in this country is funded by Defined Benefit Pension
Plans. And if that source of capital were to dry up, it would
have a dramatic impact on investments in biosciences.
It would have a dramatic effect in investments in all kinds
of technology sectors. And it would have a dramatic effect on
some of the newer attention foci of venture capital such as
Cleantech.
So it is an enormously important little engine that drives
the future of our economy. And again as a slice of the entire
Defined Benefit pool, it is very small, maybe 3 percent, two, 3
percent is allocated to venture capital, out of maybe 5 to 10
percent totally allocated to alternative investments. It is a
very small set of dollars. But in the aggregate, it is a very
significant slice of the $250 billion of capital that is tied
up in the entire U.S. venture capital industry right now.
Representative Cummings. Thank you, very much.
Senator Casey. Congressman, thank you.
I want to thank all of our witnesses and those who attended
today. This hearing is adjourned.
[Whereupon, at 12:28 p.m., Thursday, July 10, 2008, the
hearing was adjourned.]
Submissions for the Record
=======================================================================
Prepared Statement of Charles E. Schumer, Chairman
Good Morning. I would like to begin by thanking Senator Casey for
holding this important hearing highlighting the need to strengthen our
nation's retirement security. Whether he is fighting to keep rising
health insurance premiums down for workers or making sure there is
sufficient emergency funding for food assistance to help families deal
with skyrocketing grocery prices, there is no doubt that Bob Casey is a
true champion for America's families. The people of Pennsylvania--and
we here on the Joint Economic Committee--are fortunate to have him in
the Senate today.
It is no wonder that American workers today are feeling
increasingly anxious about their jobs, their wages, and their ability
to eventually retire. Every day it seems we learn more bad news about
the economy:
Just 2 days ago we learned that the already anemic
housing market continues to plummet. Sales of existing homes fell an
additional 4.7 percent in May--down 14 percent from where they were a
year ago--and by all accounts the bottom is nowhere in sight, leaving
millions of Americans with less access to credit and increasingly
worried about whether they owe more on their homes than they are worth.
This news comes on the heels of last week's Labor report
showing that the country lost another 62,000 jobs last month--marking
the 6th straight month of job losses and bringing the total number of
jobs lost just this year to almost 440,000. And as we all know,
unemployment has devastating consequences for families. Not only must
they struggle to make ends meet in the short term, but also their
retirement savings suffer as they miss out on the opportunity to
contribute to their retirement funds--assuming they were lucky enough
to have a retirement fund to begin with.
All of this news comes at a time when wages are
stagnating and prices of everything--from oil to food to consumer
products--is skyrocketing.
The most important thing we in Congress can do today is take steps
to improve the nation's economy. But we must also be taking steps to
ensure that Americans' long-term financial health is protected. We need
to ensure that all workers, and in particular those in the public
sector--our firefighters, our teachers, our police officers, have
access to retirement plans that will provide them with the security
they deserve.
Senator Casey is right to point out that strong public pension
plans benefit more than just the workers they are designed to serve.
Public sector defined benefit pension plans provide workers with 34
percent higher earnings over a 25 year period than defined contribution
plans and save taxpayers hundreds of millions of dollars in reduced
state and local government contributions.
At the same time, these plans help fuel the economy by driving
investment to venture capital funds that play a critical role in
nurturing American innovation and breakthroughs across the
technological spectrum--including life saving advances in health care.
So, it is critical that we in Congress do all we can to ensure that
public defined benefit pension plans are protected.
But we must do more than that if we are to truly improve the
retirement security of all Americans. We must encourage Americans to
save more--something I have long been a proponent of. It is
unacceptable that the U.S. ranks lowest of all industrial nations in
personal savings, with a personal savings rate of negative 1 percent
according to the U.S. Department of Commerce.
This is why I have sponsored the bipartisan ASPIRE Act that
encourages families to start saving accounts for their children. As
everyone here knows, in today's economy, asset building is essential to
getting ahead. Yet despite that fact, we are not encouraging children,
who have the most to gain from starting savings earlier in life, to
become savers. By encouraging families to start accounts at birth
(rather than when people enter the workforce), making the accounts
universal, and providing a match to low-income people, and allowing
anyone to contribute to them--the ASPIRE Act would go a long way in
helping to improve this country's savings rate.
It is clear that there is no easy answer to solving our savings and
retirement security problems. But I believe that today's discussion
about what we here in Congress can do to strengthen the retirement
security of all Americans is an important first step. I look forward to
hearing from our panelists today, and I once again thank Senator Casey
for highlighting this issue.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Representative Earl Pomeroy
Chairman Casey, Senator Brownback, Vice Chairman Maloney and
Representative Saxon, I commend you for holding this hearing ``Your
Money, Your Future: Public Pension Plans and the Need to Strengthen
Retirement Security''.
Americans are anxious. Recent figures on the economy loosing
436,000 jobs over the last few months underlie part of those uneasy
feelings. Americans are also concerned for the long run, rightfully so.
If it is your money that you must rely on in retirement, then baby
boomers need to be concerned. One-third of boomers, on the door step of
retirement, have no financial assets and among those who have financial
assets the median value of their holdings is a meager $45,900. (GAO
Baby Boom Generation)
In April, the Employee Benefit Research Institute (EBRI) reported
that workers confidence in their financial prospects for retirement
have reached a 7-year low. In EBRI's 2008 Retirement Confidence Survey,
only 18 percent of workers were very confident that will have enough
money to live comfortably throughout their retirement years. In fact,
this figure represents a sizable drop--it is one third lower than the
27 percent of workers who were very confident just 1 year ago.
Why? We are witnessing a seismic shift in the risks of retirement
as corporations with expertise and capacity to bear such risks place
the retirement risks on individuals. Workers must not only save enough
but then individuals must figure out how to make their money last
throughout their future years in retirement. Rather than feel fully
``empowered'' by their 401(k) accounts when it comes to protecting
financial security, Americans are finding that we are all in this
alone. Luckily, this is not so with public pensions.
I believe that Congress needs to champion the pension plans that
are the focus of this hearing. Clearly, defined benefit plans provide
greater retirement security to workers at a lower cost, and they
encourage economic growth in many ways.
Public pensions are the vibrant core of defined benefit plans;
unfortunately, their private sector counter parts face tough challenges
at the hands of this Administration and Congress. Prior to effective
date of the Pension Protection Act, the nation's 100 largest defined
benefit pensions rebounded from 3 years of investment losses to an
aggregate $111 billion surplus position as of the end of 2007.
(Pensions and Investments)
We have businesses struggling in this recession to pony-up more
money than they ever had to contribute before because of the Pension
Protection Act's stiffer funding requirements. While some argued that
could be a good thing for workers, there is a hitch. Private sector
pensions are a voluntary system. Employers can decide that offering a
pension no longer makes good business sense. ``Can we freeze this
pension liability?'' financial executives question as they shift more
risk to workers.
Already, 3.3 million workers have seen their pension benefit plans
frozen in some way. Many of the recently frozen plans were well funded.
According to the most recent PBGC data on its insured plans the number
of single employer-plans frozen at the end of 2005 increased by 48
percent over the 2 year period after 2003. For older workers, a frozen
pension can leave them with little time to make up for the loss in
benefits.
There is good news in today's hearing--Public Pension Plans. They
protect retirement security for 12 percent of the nation's workforce,
the plans put $150 billion dollars into the checkbooks of 7 million
retirees each year and their trustees invest $3 trillion in assets in
our economy. The public servants protecting our families and educating
our children covered in these pensions have their benefits protected in
many cases by the state constitutions which mean that plans can not be
frozen and obligations must be met. These plans are models.
Without oversight and regulation by the Federal Government, these
pensions have funded nearly 90 percent of their outstanding retirement
liabilities, in aggregate. No doubt, some plans fall short. Alicia
Munnell at the Center for Retirement Research calls this ``the
miraculous aspect of the funding of state and local pensions'' since it
occurred without a Federal law.
GAO's work on public pension confirms the general soundness of
these retirement plans. GAO also found that when governments had
difficulty making the needed annual contribution or experienced low
funding ratios, concerns about the plan's future status may exist. But
public employees do not bear the brunt. When private sector plans face
the same circumstances, they can choose a less painful way out for the
business by freezing the pensions, but public pensions must make good
on their promises to employees.
Chairman Casey, with my thanks for today's hearing, I also bring
positive news to my colleagues in the Senate. Yesterday, the House took
a strong bipartisan step forward to build retirement security by
unanimously passing a technical corrections bill that had several
important clarifications--such as asset smoothing. The Senate added
these provisions last year. There is a real urgency to fix the asset
smoothing problem for private pensions and strengthen public pensions
which the bill does. I hope the Senate moves to pass H.R. 6382 soon.
Again, I thank you for putting the retirement security needs of
American workers at the top of Congress' to do list today. I am pleased
to join you.
Let this be the starting point for a simple but forgotten truth
that Jacob Hacker highlighted in his book the Great Risk Shift:
economic security is a cornerstone of economic opportunity. Both
businesses and people invest in the future when they have basic
protection against the greatest downside risks of their choices.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of Carolyn B. Maloney, Vice Chair
Good morning. I would like to thank Chairman Schumer for holding
this hearing to examine public pension plans and how they affect
retirement security, entrepreneurship and economic growth. I also want
to thank Senator Casey for chairing.
The current turmoil in the financial markets, the housing crisis,
increasing credit card indebtedness, and the economic downturn have
exacerbated concerns about the retirement prospects of many Americans.
Rising unemployment, long-term joblessness, and falling or stagnant
wages are leaving workers feeling not only squeezed now, but also
unable to save for retirement in the future. Unfortunately, economic
downturns and bear markets have lasting, as well as immediate,
implications.
Over the past two decades, employer-sponsored retirement plans have
not only declined, but also have steadily shifted the risk and
responsibility of retirement investment to workers. Employers
increasingly have abandoned the promise of defined benefits at
retirement for defined contribution plans, where the individual
ultimately ends up bearing both the risk of longevity and investment
decisions before and after retirement.
As a result, today too many Americans are either worried that they
won't have enough money saved for a comfortable retirement or they
won't ever be able to retire. This is particularly true for women, who
typically live longer than men, but earn less over their lifetime.
Our focus today is on public pension plans, which offer a model for
providing retirement security to workers. In the defined benefit plans
offered by public pension systems, individuals are provided a steady
stream of income throughout their golden years that is protected from
market fluctuations. Moreover, public pension plans typically have
lower costs and fees while generating higher returns than defined
contribution plans, because they have a wider range of investment
expertise and opportunities available to them than individuals do.
As Mr. Pryor points out in his testimony, employee contributions
and earnings from investments make up the vast majority of public
pension funding, not taxpayer funds. In contrast to private defined
benefit plans, most public employees contribute to their pension plans.
Defined benefit plans help to attract and retain talented employees--
firefighters, police officers, teachers--to a life in public service.
The advantages to workers are clear, but there are also economic
benefits that are not as well known. Defined benefit plans provide a
``patient pool'' of available capital for investment, such as venture
capital, which leads to job creation and the promotion of new
industries and technologies. In the current credit crisis, pension
plans have played an important role in providing liquidity to the
markets.
Mr. Chairman, thank you for holding this hearing and I look forward
to the testimony today.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]
Prepared Statement of William Pryor, Vice Chairmam, Board of
Investments, Los Angeles County Employees Retirement Association,
Pasadena, CA
introduction
Mr. Chairman, members of the Joint Economic Committee, thank you
for inviting me today. My name is William Pryor and I serve as Chairman
of the Board of Investments at the Los Angeles County Employees
Retirement Association, serving approximately 151,000 participants and
managing $41 billion assets.
I also serve on the Executive Board of the National Conference on
Public Employee Retirement Systems, the largest public pension trade
association with approximately 500 public pension members who
collectively oversee nearly $3 trillion in assets for the benefit of 21
million public servants.
State and local retirement plans in the United States cover 14.1
million active employees (about 10 percent of the U.S. labor force) and
6.9 million retirees, including teachers, police officers,
firefighters, legislators, judges, and general employees. Ninety
percent of state and local governmental employees are covered by
defined benefit retirement plans. Approximately 25 percent are not
covered by Social Security, including close to half of public school
teachers and about 70 percent of police officers and firefighters.
State and local retirement plans paid annual benefits of $150 billion
averaging about $20,700 per retiree in 2007.
The bulk of public pension benefit funding is not shouldered by
taxpayers. On a national basis, employer (taxpayer) contributions to
state and local pension systems make up less than one-fourth of all
public pension revenue. Earnings from investments and employee
contributions comprise the remainder. In 2006, investment earnings
accounted for 75 percent of all public pension revenue; employer
contributions were 16 percent; and employee contributions accounted for
9 percent. Unlike corporate workers, most public employees are required
to contribute to their pension plans.
Traditional public employee pension systems have resisted the shift
to defined contribution (DC) plans recently seen in private sector
employment. The decision to remain with traditional pension plans is a
policy decision by local governments carefully made with its costs and
benefits considered. Local governments support defined benefit (DB)
plans as a cost effective measure to pay for a sustainable retirement
for employees and to allow for recruitment and retention of a well
trained work force. Additionally public DB plans play an important role
in local economies as a consistent and long term investor in multiple
asset classes.
background
Generally traditional pension plans attempt to support an employee
at a 70 to 90 percent salary replacement rate upon retirement. This
replacement level may consider not only the traditional pension
annuity, but supplemental allowances or health care supplements the
employee may have earned during active employment. Additionally, many
public employees are outside of Social Security. It is estimated that a
third of all public employees and 75 percent of public safety employees
are not covered by Social Security. Thus, for many of us, our pension
plans may be our only retirement income. With recent dramatic rises in
health care costs and general living expenses, studies now indicate a
replacement rate of over 100 percent and as high as 126 percent of
final salary may be required for a sustainable retirement.\1\
---------------------------------------------------------------------------
\1\ Hewitt Associates ``Total Retirement Income at Large Companies:
The Real Deal.'' June, 2008.
---------------------------------------------------------------------------
Traditional local and state public pension plans are well run, well
diversified and provide a return on investment that cannot be
duplicated with private retail mutual funds. Recently a report from
Morningstar compared retail mutual funds with traditional public
pension plans and found those public DB plans out performed their
private counterparts by 3.22 percent.\2\ In traditional Morningstar
comparisons public pension plans averaged four stars, while moderate
allocation mutual funds (assumed peer group) only getting three.\3\
---------------------------------------------------------------------------
\2\ ``The Relative Performance Record and Asset Allocation of
Public Defined Benefit Plans'' Morningstar in conjunction with NCPERS.
December, 2007, Page 5.
\3\ Ibid 2, page 7.
---------------------------------------------------------------------------
Traditional public pension plans hold nearly 3 trillion dollars in
assets, equal to more than 20 percent of the nation's entire gross
domestic product,\4\ and capture over 20 percent of the nations entire
retirement market. These plans play an important part in the U.S.
economy as long term, well diversified investors.
---------------------------------------------------------------------------
\4\ Federal Reserve Board--2008
---------------------------------------------------------------------------
A majority of local and state agencies participate in Social
Security, but not all agencies are required to participate. Most
pension systems provide either retiree health plans and life or long
term care products to retirees on a pooled and guaranteed basis. Plan
designs for public pension plans vary with size, geography and
classifications of employees represented.
public employee db pension plans provide benefits not traditionally
offered in private dc schemes.
Traditional pension plan benefits provide income that attempts to
replace a portion of employee's salaries upon retirement. This may be
an employee's salary for service with either one employer or multiple
employers who participate in direct reciprocal agreements. Most
traditional pensions are supplemented by death and survivor benefits,
additional annuities purchased through the pension plan, health care
provided by the plan and other pooled insurance services offered as
optional benefits for participants. These additional benefits may be
paid by the employer, provided on a matching basis, or with no employer
subsidy.
Traditional pension plans usually provide a death and survivor
benefit that will ensure a defined benefit survivor allowance to family
members of employees that may have lost their lives as a result of
public service employment. These survivor benefits provide a ``floor''
level allowance even if the employee has not gained enough retirement
credit to allow a sustainable income replacement. This survivor
allowance may be higher if the dead or disabled employee has gained
enough service credit to exceed this floor benefit.
There are many insurance products designed for temporary or
permanent income replacement that are available for employers'
purchase. However, only DB plans are capable of generating a high level
of allowance (in many cases, 50 percent of the employee's annual
income) while spreading risk among the entire employee pool.
When trying to insure public safety employees; most insurance
underwriters will not carry police and fire employees without a larger
group of general employees to share the risk. The possibility of large
scale loss of life and high rates of industrial disability are outside
the boundaries of an acceptably insured employee group. As testimony,
our 3000 member firefighter local has sought coverage under an
underwritten long term care policy for active duty firefighters for 6
years but has not had coverage through a common long term care
provider. No larger underwriter of LTC policies will accept a safety
only pool.
Next to survivor and disability benefits the next most common
ancillary benefit is health care insurance. Because of the ability to
pool beneficiaries and guarantee coverage, pension plans are ideally
suited to provide this benefit. System-provided health care allows
employees to begin saving for retirement medical care as an active duty
employee through benefit funds that will be utilized on retirement.
Many pension plans allow retirement medical savings within the
retirement plan design, with the fund administering the benefit. This
allows for consistent crediting of investment interest with very low
fees. As a result, employees are provided health insurance with
guaranteed coverage at low cost and very high level of quality of care.
db pension plans and their effect on local economies in california
The contribution of traditional public employee pension plans in
California can be seen in the stable and sustainable income paid to
their retirees and the impact of those pension payments on California's
economy. These benefits also ``compound'' where retiree payments are
invested back into the retirement system investments (real estate,
venture capital, equities) through normal spending and those
investments again, returning to the retiree because they are spending
on their own investments. While most traditional public pensions are
well diversified investment vehicles, California public pension plans
invest heavily in local real estate and private ventures due to
familiarity with the sector and its participating managers and owners.
California pension plans, with similar numbers nationwide, pay
around 76 percent of retiree payroll with investment income. The
remaining amount is generally equally divided between employer and
employee contributions.\5\ These payments are paid to retirees as
pension payments or other pension benefits. Currently, the average
Ca1PERS retiree left service at 60 years old and will receive an
average monthly allowance of $1,876 or $22,512 per year.\6\ Typical of
most pension systems, the value of this retirement can be enhanced with
other pension system provided benefits such as a funded cost of living
enhancement or retiree health care.
---------------------------------------------------------------------------
\5\ Sacramento State University ``The Combined Annual Economic
Impacts of CalPERS and CalSTRS Retirement Income Benefit Payments.''
April 2007, Page 2,5,7.
\6\ ``Facts at a Glance'' CalPERS, July 2008, Page 1.
---------------------------------------------------------------------------
With over two million public employees retired and contributing to
the California economy, those CalPERS, CalSTRS and County payments are
a significant part of the California salary base and as is their
eventual disbursement into the California economy. For CalPERS alone
this means over 13 billion dollars in direct retiree payments and
estimated total economic activity for the State. Those allowances can
mean over 21 billion dollars in total economic revenues for the
state.\7\ Additionally this output means employment to 137,974 state
residents. When teachers and County retirement systems total payments
and their impact is reviewed, total direct retiree payments reach 25.5
billion and their total economic impact reach an annual 41.5 billion
dollars on the California economy solely as a result of benefit
payments to resident retirees.\8\
---------------------------------------------------------------------------
\7\ Ibid footnote 1, page 6, Table 2.
\8\ Russel Read--Powerpoint ``Impact of CalPERS Investments on the
State of California'' http//www.calpers.ca.gov/index jsp?bc=/
investments/video-center/view-video/cpfi-conference/calif-invest-econ-
study.xml
---------------------------------------------------------------------------
The provision of good retiree health care also has an impact on the
California economy. Again, there are over 2 million employees pooled
into retirement system negotiated health care contracts. This means
that a pooled, guaranteed insurance product can be offered. Since over
50 percent of retirees having two or more serious medical
conditions,\9\ up to one million retirees would be left in jeopardy of
losing health care coverage due to chronic health problems. With
pension system negotiated health insurance, these retirees have a
vehicle to negotiate quality care at a reasonable price and guarantee
coverage for those whom may otherwise be in jeopardy.
---------------------------------------------------------------------------
\9\ ``Health Care Coverage for Retirees'' Congressional Research
Service, Cornell University 2006. Page 3.
---------------------------------------------------------------------------
local and statewide investment by california pension plans
Like most large traditional public pension funds, CalPERS, CalSTRS
and County retirement systems spend a slightly larger share of certain
asset classes on California centered investments. This can be
attributed to a political emphasis on local investment, a familiarity
by investment staff with private investments, and an awareness by their
managers of investment projects specifically designed to target an
undervalued market.
Usually with the assistance of asset managers or other
intermediaries, local investment has become a common practice across
most asset classes. Since returns have been equal to or greater than
other investments this trend is expected to continue.
As a natural result of California's large stake in private equity
or venture capital holdings and the large base of real estate
investments centered in the state, public DB plans will naturally have
a bias toward state investments. The large proportion of hi-tech
industries and now clean-tech sectors based in California meant a
natural ``overweight'' to California businesses. The origination of
these industries in California has meant opportunities for ``ground
floor'' investments in startup companies in California companies. These
opportunities are usually brokered through private equity and venture
capital funds that also have a California bias in their investment
style. This regional emphasis allows both the pension system and their
outside managers to find proper investments in private equity
investments and fulfill their obligation for due diligence on the
investment with other, familiar managers or companies.
There is also a concentration of California plans in local real
estate options. This can be directly attributed to the familiarity of
investment staff in California real estate opportunities and the
managers making those investments. Real estate managers tend to be
centered in one geographic area, as with many of our alternative assets
they generally are more successful when they are smaller in size but
large enough attract cash investments and partnerships from large
institutional clients. Often, manager styles and investment types can
be matched to a need of some members of the system. One example would
be the recent investment in urban centers in multi-family apartment and
condominium sales. Not only were units built with retirement system
investments in urban centers in need of revitalization, members of the
system are seen as quality owners with good credit and income and were
given the opportunity to purchase these investments with attractive
financing incentives.
db pension plans and the economic cycle
In addition to contributing to California's investments public
pension systems, traditional DB pension plans play an important role in
the overall U.S. and international economic cycle. Traditional public
pension plans have a unique profile for asset managers: we are long
term, patient investors that generally base our performance on annual
returns, or returns over a several years, not the next quarter. While
other retail funds, or even institutional funds have immediate demands
to produce over a short term horizon, traditional pension plans may
make investments in venture or real estate funds that may not be fully
realized for as many as 20 years.
A current reminder of the importance of DB capital on the economy
would be the current credit crisis and the importance of DB plans in
smoothing some of the volatility of the event. While many lenders have
shuttered their doors to many kinds of financing due to risk, pension
plans and their managers are lending to private equity investments at a
high rate, plugging the hole that lending banks have left. This recent
trend provided our funds an investment opportunity in well researched
cash outlays and provide much needed capital to companies hungry for
loans. The pension funds' abilities to lend large amounts within a
reasonable asset allocation with low risk provide them with unique
opportunities and advantages in contrast to other asset managers.
conclusion
Traditional public employee pension plans are well funded,
diversified investment vehicles that serve their members in all aspects
of retirement. They also provide an important role in the local and
national economy as patient, long term investors. Finally, these are
nimble enough to take advantage of local investment opportunities that
are frequently overlooked by other large investment vehicles.
Again, thank you for this opportunity to present my views. I would
be happy to answer any questions the committee may have.
__________
Prepared Statement of P. Sherrill Neff, Partner, Quaker BioVentures,
Philadelphia, PA
introduction
Members of the Committee, good morning. My name is Sherrill Neff
and I am a partner with the venture capital firm Quaker BioVentures
located in Philadelphia, Pennsylvania. Thank you for the opportunity to
testify today on a very important issue for the venture capital
industry: the role of defined benefit pension plans as a critical
source of capital formation for both our industry and the startup
companies in which we invest.
By way of background, Quaker BioVentures is a venture capital firm
investing in life science companies, including biopharmaceuticals,
medical devices, human diagnostics, specialty pharmaceuticals, and
healthcare services. My partners and I invest in companies at all
stages of development, from the earliest stage of businesses to later
pre-public companies. The firm was formed in 2003 and is currently
investing Quaker BioVentures II, a $420M fund raised in 2007. In total,
Quaker BioVentures manages over $700M in committed capital of which
approximately 75 percent percent comes from large public and private
defined benefit plans. Our investors include 10 public pension funds
from six different states and major corporate pension funds. Since
2003, we have invested in 28 life sciences companies, most of which
were startup or early stage companies, and all of which are pursuing
important and innovative therapies, devices, diagnostics or other
healthcare services.
My firm is also a member of the National Venture Capital
Association (NVCA). The NVCA represents more than 480 venture capital
firms in the United States and advocates for policies and legislation
that are favorable to American innovation and entrepreneurship. In 2007
alone, venture capitalists invested approximately $30 billion into
small, high-risk, emerging growth companies in areas such as life
sciences, information technology, homeland security, and clean
technology. The goal of our industry is simple--using the most
innovative new products and services to market in the most efficient
manner, while maximizing returns for our institutional investors.
Today I would like to explain how the venture capital industry
raises and invests money, the economic implications of this investment,
and the importance of defined benefit pension plans in that equation.
venture capital fund structure
Venture capital is a relatively small, but extremely unique sub-
sector of what many institutional investors refer to as alternative
assets. Venture capital funds are set up as limited partnerships in
which sophisticated institutional investors or limited partners
(``LPs'') provide capital to a fund managed by a group of venture
capitalists or general partners, (``GPs''). The GPs invest this capital
along with their own in high risk and often high tech private startup
companies that demonstrate a tremendous promise for growth over the
long term. The typical investment horizon for a venture-backed company
is 5 to 10 years, often longer and rarely less. Once the company has
grown to a viable size, it either goes public or becomes acquired by a
strategic buyer, hopefully at a significant investment return to the
venture capital fund, the entrepreneur, and the LPs. Given the high
risk nature of the investment, it is understood that many venture-
backed companies ultimately fail. However, those that succeed return
top dollars to investors and create jobs and revenues for the US
economy. Yet, it is not an investment for the faint at heart.
For that reason venture capital LPs are highly sophisticated
investors who understand the value of ``patient capital''. They
recognize that their investment will not be liquid for some time but
they are willing to make that commitment for the benefit of higher
returns. The life of a venture capital fund is typically set at 10
years but in reality, it is often much longer--15 to 17 years--until
the last investment is harvested and distributions are made. Yet, on a
pooled basis over the long-term, the venture capital asset class has
outperformed the public markets for many years. The 10 year performance
for all venture funds through 12/31/2007 was 18.3 percent as opposed to
NASDAQ which registered 5.3 percent and the S&P 500 which was 4.2
percent. Source: Thomson Reuters/NVCA.
Approximately 90 percent of venture capital commitments come from
institutional investors--defined benefit pension funds, insurance
companies, university endowments, corporations and foundations. The
small percentage of individual investors who become venture fund
limited partners are designated as high net worth and have the
financial resources and staying power to commit large amounts of
capital to illiquid investments for periods of time that, as I
explained, can exceed a decade. All of these investors have the ability
to obtain significant independent financial advice in order to evaluate
potential investments. For this reason, under applicable securities
laws, venture capital limited partnerships are not required to be
registered with the Securities and Exchange Commission.
The relationship between the GPs and the LPs is extremely important
in the venture capital life cycle. GPs spend a considerable amount of
their time and effort raising the fund which they intend to invest in
emerging growth companies. The fundraising process consists of
preparing offering materials, identifying and meeting with appropriate
and compatible investors (LPs) and their professional advisors,
responding to LP due diligence requests, and negotiating the terms of
their commitment. It is not unusual for this fundraising process to
take a year or longer. However, once an institutional investor joins a
fund as an LP, they are likely to invest in follow on funds if the
relationship is a good one. Participation in the most successful funds
is highly competitive. Funds will indeed turn away money from
institutional investors once their target fund level is achieved.
The venture capital industry would not exist without the support of
limited partners who provide the majority of the capital invested in
the young businesses. In return, the general partners provide time,
management expertise and experience in identifying and nurturing these
companies so that they grow into viable and valuable businesses.
the role of defined benefit plans in the venture capital system
You have heard from the other witnesses today about many of the
positive contributions that defined benefit plans offer their
participants. I would like to address an attribute of the defined
benefit plans that may be less well known: the role of defined benefit
plans in the funding and growth of the venture capital industry and the
entrepreneurial segment of the US economy.
Defined benefit pension plans have historically been a sizable and
reliable pool of capital for venture fund formation and thereby for
investment into the nation's emerging growth companies. The US venture
capital industry would not be the economic engine it is today without
the strong investment participation from defined benefit plans. Federal
rules first permitted defined benefit plans to invest in venture
capital in the 1980s.
In 1974, the Employment Retirement and Income Security Act (ERISA)
was enacted to protect the pension and welfare benefit rights of
workers and beneficiaries. Private pension plans had already been in
existence for many years, but the passage of ERISA marked the growing
importance of these private plans in the retirement income equation.
One of the critical regulations which was established for the first
time by the Federal Government in ERISA concerned the investment of
pension assets by those responsible for their control. The Department
of Labor was given exclusive authority to issue regulations and rulings
that define who is an ERISA fiduciary. Thus, in 1979 the Department of
Labor issued its ``prudence regulation'' which interpreted ERISA as
allowing pension plans to invest in young, smaller companies. This
regulation provided managers of pension funds the ability to channel
money into venture capital funds which they have done in increasing,
yet reasonable amounts ever since.
As a direct result of the ERISA ``prudent man rule'' money from
public and private pension funds began to flow into the venture capital
space beginning in the 1980s. In 1980 private independent venture funds
had just over $4 billion in capital under management. This rose to $18
billion in 1985, $28 billion in 1990, $41 billion in 1995, $225 billion
in 2000, and $257 billion in 2007. Much of this growth is attributable
to the success of venture capital investment and the receptivity of
defined benefit plans to the high returns the asset class afforded
them.
Yet the mix of limited partners is changing. Because many US based
private pension plans have been converted from defined benefit plans to
defined contribution plans over the past several years, we are seeing
fewer private pension plans actively investing in venture. Filling that
gap are LPs from outside the United States, including foreign public
and private pension funds who are becoming increasingly interested in
investing in US based venture capital funds.
Yet US public pension plans continue to be critical and reliable
sources of capital for US venture funds. The vast majority of state
pension funds and many local public pension funds invest a small
portion of their assets in private equity because they understand that,
while long-term and sometimes riskier than bonds and stocks, venture
capital can deliver returns that boost the overall financial position
of the fund. Today all but a few states permit their public pension
funds to invest a small amount of their assets into the venture capital
asset class. States that have been long-time venture capital investors
include California, Washington, Pennsylvania, and Wisconsin.
Most public entities invest only a small portion of their
investible assets in private equity/alternative assets, often less than
5 percent, because of the potential risk and long term nature of the
asset class. Thus, in exchange they expect to receive a return on
investment that is much higher than traditional asset classes. Defined
benefit plans usually diversify their commitments to alternative asset
classes two ways: (1) by investing across different alternative asset
sub-classes (real estate, buyout, private equity, venture capital and
hedge funds; and (2) within each sub-class investing in a large number
of different managers. As a result, the pension plan's exposure to any
one alternative asset class or to any one manager is very limited.
Venture capitalists who take defined benefit pension plans into
their funds do so because these fund managers are long-term, patient
investors who understand the nuances and risks of venture investing.
Additionally, VCs have found defined benefit pension LPs to be
knowledgeable, forthright and valuable investment partners over the
length of the fund. With demand for participation in venture capital
funds at an all time high, this trusted relationship helps guarantee a
coveted spot for defined pension plans. However, should these plans
convert to defined contribution plans, that spot will be forfeited to
other institutional investors as the requirements for investment in the
venture capital industry are not compatible with the characteristics of
defined contribution plans.
the economic impact of venture capital investment
When a defined benefit pension plan invests in a venture capital
fund, it is not only creating higher returns for its pensioners, but it
is also supporting one of our country's most important economic
engines. Literally thousands of companies would not exist today were it
not for the venture capital investment support they received early on.
Federal Express, Staples, Outback Steakhouse and Starbucks are well
known examples of traditional companies that were launched with venture
backing. Cisco, Google, EBay, Yahoo and countless other technology
companies were all, at one time, just ideas that needed startup capital
and guidance.
In the same vein, venture capital has been an important catalyst
for innovation in the life sciences and a multitude of medical
innovations would not have been possible without it. Genentech started
with venture backing. So did Amgen, Genzyme and Medtronic. Over the
last several decades, venture capitalists have partnered with
scientists to build successful businesses and bring to market such
drugs as Herceptin, an important part of our war on cancer and
Integrilin, which significantly reduces blood clotting. Studies suggest
that more than one out of three Americans will use a medical product or
service generated by a venture- backed life sciences company.
According to the econometrics firm Global Insight, last year US
based, venture-backed companies accounted for more than 10.4 million
jobs and generated over $2.3 trillion in revenue. Nearly one out of
every ten private sector jobs is at a company that was originally
venture-backed. Almost 18 percent of US GDP comes from venture-backed
companies.
Venture investors are constantly looking for the next ``big thing''
and these days, many of my colleagues are active in building
alternative energy companies in what is called the ``clean technology''
industry, a sector which I'm sure we all agree will play a vital role
in America's global competitiveness for years to come.
None of this value would have been possible without the active
investment of public and private defined benefit pension funds. The
relationship between the venture industry and defined benefit managers
is a symbiotic one that creates high returns for the investors and the
US economy. It represents a highly efficient use of capital that we
assert should remain in the system. I can tell you unequivocally that
most venture firms would prefer to ensure (1) that the jobs and
technologies we fund be based here in the US, and also (2) that the
returns we generate on our investments also be returned to American
pension beneficiaries. That will continue to occur as long as the
defined benefit plans are embraced as an important part of our overall
retirement system.
conclusion
Thank you for the opportunity to weigh in on this important issue.
We look forward to working with many of the large defined benefit
pension managers for years to come. The support of these programs not
only helps pension holders, but also creates jobs, generates revenues
and fosters innovation for our country, contributing to a healthy US
economy at both a micro and macro economic level.
I am happy to answer any questions.
__________
Prepared Statement of Christian Weller, Ph.D., Senior Economist, Center
for American Progress, Washington, DC
Thank you Chairman Schumer, Vice-Chair Maloney, Ranking Republican
Brownback, Ranking Member Saxton, Senator Casey, and members of the
Joint Economic Committee for this opportunity to speak to you today. My
testimony this morning will address the public- and private-sector
impacts of defined benefit pension plans in the public sector. I will
specifically discuss the long-term economic performance of state and
local defined benefit pension plans and how this performance compares
with that of defined contribution plans.
A recent poll conducted by Bankrate Inc. found that only about 3 in
10 workers expect to have enough money to retire comfortably. Nearly 7
in 10 Americans have set low expectations about their retirement
prospects. One in five Americans says they are afraid they will never
be able to retire (Austin Business Journal, 2008).
It is not hard to see why so many Americans feel so uneasy about
their future retirement prospects. An ever smaller share of workers has
a retirement savings plan at work. For instance, only 43.2 percent of
private sector workers had an employer-sponsored retirement plan,
either a traditional pension or a retirement savings plan, in 2006, the
last year for which data are available (Purcell, 2007). This is the
lowest share in more than a decade and a substantial drop from 50.0
percent in 2000, the last peak. In addition, a growing number of
workers are saving with defined contribution retirement savings plans.
This can leave workers exposed to a number of new risks--a point I will
return to later in my testimony. It also means that wealth creation
carries unequal tax rewards, depending on one's earnings. Because
contributions to these retirement savings plans are tax deductible,
higher-income earners tend to receive a larger tax benefit from
contributing to their DC plans than lower-income ones.
These longer-term trends have been overshadowed by recent drops in
financial and nonfinancial market wealth. Families have lost a lot of
financial wealth due to a sharp decline in stock prices. Since the
beginning of the year alone, the S&P 500 had lost 12.5 percent of its
value by the end of June 2008. Also, the fact that homeowners were
highly leveraged due to the recent mortgage boom meant that they stood
to lose a lot when house prices began to fall (Weller, 2006). Recent
data from the Federal Reserve, for example, show that home equity
relative to income dropped by 5.0 percentage points by March 2008,
compared to a quarter earlier, the largest such drop on record.\1\
These adverse trends have meant that a growing number of families will
have to rely solely on Social Security as source of retirement income
(Baker and Rosnick, 2008).
---------------------------------------------------------------------------
\1\ Author's calculations based on BOG(2008).
---------------------------------------------------------------------------
In light of such trends, policy solutions are necessary to restore
the promise of a retirement in dignity for the all working families in
America. Here, policymakers could focus on elements of our retirement
system that are working well. State and local defined benefit, or DB,
pension plans stand out as an example of what works when it comes to
achieving broad-based retirement income adequacy at a reasonable cost.
A review of the economic evidence on state and local DB plans tells us
that these pension plans have proven themselves as model retirement
systems. They have a successful track record of performance in
delivering adequate benefits in a sustainable and efficient manner.
features of a model retirement plan
If one were to design an ideal retirement plan, it would probably
encompass the following features:
broad-based coverage, which covers all workers
automatically
secure money for retirement, with limited opportunities
for leakage of retirement assets
portability of benefits, which will allow workers to
retain benefits if they switch jobs
shared financing, with contributions from both employees
and employers
lifetime benefits, so that retirement income cannot be
outlived
spousal and disability benefits to provide protections
against death or the inability to work
professional management of assets
low costs and fees.
The DB plans that provide retirement benefits to employees of state
and local governments typically meet all of these criteria for a model
retirement system.
Broad-based coverage
Employees must simply meet the eligibility requirements of the DB
plan to earn benefits in a public sector DB plan. They are then
automatically enrolled without having to make any active decisions.
This truly ``automatic'' enrollment is a typical characteristic of
DB plans. Private sector DB plans also automatically enroll all
eligible workers.
Defined contribution, or DC, plans, on the other hand, often
require employees to enroll themselves, and then to make difficult
decisions about how much to save and where to direct their investments.
In passing the Pension Protection Act of 2006, Congress
acknowledged this flaw inherent in DC plans, and attempted to make
automatic enrollment and efficient asset allocation easier. It is too
soon, however, to reach any conclusions about the law's effectiveness
on increasing automatic enrollment in DC plans.
Secure money for retirement
State and local DB plans provide a secure source of income in
retirement for a number of reasons. First, one's funds cannot be
borrowed from, and typically are not distributed as a lump-sum payment.
That is, benefits under a public sector DB plan, as well as many
private sector DB plans, will be there to provide a lifetime stream of
retirement income. Moreover, a rather obvious point is that the plan
sponsors of public sector DB plans are state and local governments,
which typically do not go bankrupt, which is sadly not always the case
for single-employer private sector DB plans.
The security of assets in DC plans for future retirement income is,
in comparison, compromised. Importantly, the vast majority of
individuals in DC plans can borrow from their retirement accounts or
withdraw funds before retirement age. Economists use the term
``leakage'' to describe assets that are drawn out of retirement savings
plans for purposes other than providing retirement income. According to
one conservative estimate, a full 10 percent of all retirement wealth
is lost due to leakage from DC plans (Englehart, 1999) Another study
found leakage to be ``concentrated among individuals vulnerable to
poverty in old age'' (Hurd and Panis 2006). Loans from DC plans have
risen, especially to allow families to smooth over economic hard times,
which will likely reduce their retirement income security (Weller and
Wenger, 2008).
Portability of benefits
Public pension plans are responding to changing workforce needs in
public service by offering much greater portability than in the past.
Often, if employees move to another government position within the
state, they are able to carry pension benefits with them; should they
move to other jurisdictions, they can usually purchase service credits
(Brainard, 2008).
This portability also exists for most DC plans and in some private
sector DB plans, so-called multiemployer plans.
Shared financing
The funding of state and local DB plans is a shared responsibility
between employee and employer unlike private sector DB plans, in which
employers typically finance the entire benefit. In 2004, for workers
covered by Social Security, the median employer contribution rate was 7
percent of salary, while the employee contributed an additional 5
percent of salary (Munnell and Soto, 2007).
Also, because public sector DB plans are prefunded--they accumulate
assets to cover all expected current and future benefit payments--
employer contributions account for only a small share of the funds
flowing into public plans that can be used to pay benefits. According
to data from the Census Bureau, employer contributions comprised about
18 percent of all public pension revenue over the 10-year period 1996
to 2006. Investment earnings made up 73 percent of revenue during that
time, and employee contributions accounted for the remainder (Census,
2008).
Lifetime benefits
State and local DB plans are designed so that retirement income can
never be outlived--retirees are a guaranteed paycheck for life. This is
also the case with private sector DB plans that have to offer an
annuity benefit, even if it is as an alternative to a lump-sum
distribution.
This is in stark contrast with DC systems. Here, the burden of
managing one's retirement income, so that retirees do not run out of
savings in retirement falls mostly on the individual. In many cases,
though, employees do not understand how much money they will need in
retirement, the result being that many workers do not save sufficiently
and face inadequate income in retirement. In order for a private sector
worker to purchase a modest annual annuity of $20,000, she must
accumulate an estimated $260,000 in a 401(k). The median 401(k) balance
for heads of households approaching retirement in 2004, however, was
just $60,000 (Munnell and Soto, 2007). Further, Boston College
researchers have found that, in part due to the shift from DB to DC
plans in recent years, between 44 percent and 61 percent of households
are at risk of being unable to maintain their living standards in
retirement (Munnell, Webb, and Golub-Sass, 2007).
Spousal and disability benefits
State and local DB plans typically provide special protections for
spouses of married beneficiaries, as well as disability benefits for
active employees who are stricken by illness or injury that prematurely
ends a career.
Disability benefits are especially important for state and local
government employees, since many workers, such as police officers and
firefighters, have high-risk jobs.
Spousal benefits are particularly important as well, as women have
much lower retirement incomes than men (Even, 2004) and single elderly
women have even lower incomes. According to one recent study, among the
entire population aged 65 and older, 19.1 percent of women living alone
were in poverty in 2006, compared to 11.5 percent of all women and 6.6
percent of all men who lived in poverty in that year (Hounsell, 2008).
Professional management of assets
Public sector plans and private sector DB plans are managed by
professionals with ``considerable financial education, experience,
discipline, and access to sophisticated investment tools'' (Watson
Wyatt, 2008).
The individualized nature of DC plans, though, means that these
rely on self-management. I will elaborate in greater detail on the
significant economic benefits professional management provides further
below.
Low costs and fees
Evidence shows that administrative costs are substantially higher
for DC plans as compared to DB plans. An international study of plan
costs finds that while, on average, fees can range between 0.8 percent
and 1.5 percent of assets, larger institutional plans can reduce such
fees to between 0.6 percent and 0.2 percent of assets (James, Smalhout
and Vittas, 2001). The UK Institute of Actuaries finds very high
administrative costs for DC plans--of 2.5 percent of contributions and
up to 1.5 percent of assets--leading to the equivalent of a 10 to 20
percent reduction in annual contributions; DB administrative costs,
however, amount to just 5 to 7 percent of annual contributions (Blake,
2000). Similar differences exist in the United States, with DB plans
incurring substantially lower fees than DC plans (CII, 2006; Weller and
Jenkins, 2007).
adequate retirement benefits
Obviously, designing a model retirement plan is not a means unto
itself. It is intended to generate adequate retirement income for
beneficiaries. DB plans, whether in the public or private sector, tend
to be very effective at ensuring that employees will have adequate
resources in retirement to support themselves because these types of
retirement plans often incorporate all of the features laid out in the
previous section.
An ``adequate'' replacement rate is typically defined as one that
allows a retired household to enjoy roughly the same standard of living
as it did before retirement. This standard of adequacy might be deemed
to fall anywhere between 75 percent and 85 percent of preretirement
income.
Research shows that retirees with DB pensions are much more likely
to have adequate retirement income than those relying on DC plans
(Munnell et al., 2008). Also, a 2007 Federal Reserve study found that
the median wealth held in a DB pension plan is about two times larger
than the median holdings in DC plans and IRAs. This indicates that DB
pension plans tend to be better at ensuring employees are able to
accumulate adequate resources for retirement (Love, Smith, and McNair,
2007).
In a DB plan, an individual employee's benefit is typically
determined based on a simple formula; this benefit is calculated by
multiplying the employee's final salary (averaged over three to five
final years of employment) by their number of years of service, and
then by a set retirement multiplier. For example, under a system with a
retirement multiplier of 1.8%, an employee with a final average salary
of $40,000 and 30 years of service will receive an annual benefit of
$21,600 ($40,000 x 30 x 1.8%). This benefit, then, would replace 54% of
the employee's final average salary. This amount, when added to Social
Security benefits, would enable the employee to maintain their middle-
class standard of living throughout their retirement years.
However, it should be noted that approximately 25 percent of all
state and local government employees do not participate in Social
Security (Brainard, 2007) and therefore require a larger pension
benefit in retirement in order to compensate for their lack of Social
Security income. In 2006, the median retirement multiplier was 1.85
percent for Social Security-eligible employees and 2.20 percent for
non-Social Security-eligible workers (Brainard, 2007). This means, on
average, employees who work for a full 30 years in public service will
receive a pension that replaces 55.5 percent of final earnings if they
are Social Security eligible, and 66 percent of final earnings if they
are not Social Security eligible.
Given these replacement rates, public pensions offer income
adequacy in retirement that is manageable and sensible. In 2006, for
example, the median public sector retiree received a benefit of $22,000
per year (McDonald 2008). Combined with Social Security, such pension
benefits generally add up to an adequate retirement income. For
instance, a typical worker in Pennsylvania, where the multiplier is 2.5
percent of the final average pay for each year of service, could expect
to replace about 78 percent of their pre-retirement earnings after a
full-career and 52 percent with a partial career in state employment
due to the combination of a DB pension, Social Security, and savings in
a DC plan (Weller, Price, & Margolis, 2006). State and local DB plans,
then, comprise a system of reasonable and adequate income replacement
in retirement.
sustainability and efficiency of db plans
Importantly, these adequate benefits are sustainable in the long
run. Because of their group nature, public sector DB plans create
significant economies for taxpayers and employees, which allow them to
offer retirement benefits in an efficient manner.
Two sets of factors drive these economies. First, because public DB
plan assets are pooled and managed by professionals, these systems can
achieve higher returns, at a lower cost, than DC plans based on
individual accounts. Second, DB plans lower costs for participants and
plan sponsors by pooling mortality and other risks.
The benefits ofpooled, professional asset management
By pooling assets, state and local DB plans are able to drive down
administrative costs and reduce asset management and other fees. Asset
management fees average just 25 basis points for public pension plans.
By comparison, asset management fees for private 401(k) plans range
from 60 to 170 basis points (Munnell & Soto 2007). Thus, DC plans
suffer from a 35 to 145 basis point cost disadvantage.
This disadvantage may appear small, but like water carving a canyon
out of rock, over a long period of time, it compounds to create a
significant affect on assets. For example, over 40 years, a 100 basis
point cost disadvantage compounds to a 24 percent reduction in the
value of assets available to pay for retirement benefits (Weller &
Jenkins, 2007).
Investment decisions in state and local DB plans are made by
professional investment managers, whose activities are overseen by
trustees and other fiduciaries. Public pension plan assets are broadly
diversified and managers follow a long-term investment strategy.
In analyzing public sector pension plan investment behavior,
Professor Jeffrey Wenger and I have found that state and local plans
exercise a great deal of prudence, tending to rebalance their assets
regularly in response to large price changes. Also, public sector plans
holdings of higher-risk/higher-return assets increases when these plans
have higher funding levels, thereby indicating that plans do not
``chase return'' in response to lower funding levels. Specifically, the
equity allocation is larger in the period after we observe higher
funding levels, which suggests that trustees wait to know what their
financial situation is before they change the risk exposure of their
portfolio. In addition, public sector plans' holdings of equities is
smaller when demands on employers in the form of higher contributions
increase. This relationship seems to have become stronger after 2000,
which suggests that public sector plans not only avoided employer
conflicts of interest as larger demands on employers in the previous
period translated into a ``flight from risk,'' but if anything, these
plans may have become more cautious in their asset allocation following
a period of underfunding (Weller & Wenger 2008).
The prudent investment behavior of professionally managed DB plans
stands in contrast to the situation in DC plans where individuals
direct their own investments. Research finds that asset allocation in
retirement savings plans is considerably more volatile than what is
found in professionally managed DB plans (Boivie & Almeida 2008).
In addition, a wide literature in the field of behavioral finance
finds that despite their best efforts, individuals often make poor
decisions when it comes to investing for retirement (Benartzi & Thaler
2007). For example, Holden and VanDerhei (2001) found that more than
half of all DC plan participants had either no funds invested in
stocks--which exposes them to very low investment returns--or had
almost all their assets allocated to stocks, making for a much more
volatile portfolio. Other research has found that many individuals'
inertia subjects asset allocation in individual accounts to acute
imbalance. At the other extreme, some individuals engage in excessive
trading, which results in the problem of buying high and selling low
(Mitchell & Utkus 2004; Munnell & Sunden 2004). This puts individual
savers at a disadvantage vis a vis professionally managed DB plans,
leaving individual savers to pay more for fewer benefits.
Another advantage of pooling and professional management is that DB
plans can take advantage of broader diversification strategies. In
recent years, some DB plans have allocated a small percentage of their
holdings to include so-called ``alternative'' investments such as
private equities, venture capital, and hedge funds. These investments
can help to improve the returns and/or reduce the overall risk of a
plan's portfolio by introducing assets whose returns are uncorrelated
(Seco 2005; Phillips & Surz 2003; Indjic & Partners 2002).
Such diversification may allow a plan to show just single-digit
losses in a market decline, for example, when other equities may show
double-digit losses--a result that can significantly affect a
retirement plan's compounded rate of return over time. Data from Watson
Wyatt (2008) show that during the 2000 to 2002 market downturn, DB
plans outperformed DC plans, in part because of their exposure to a
broader range of assets, including alternatives.
However, in order to successfully invest in such ``alternative''
assets, investors must have a long time horizon and must have a high
degree of sophistication to understand these often complex investments.
Such factors make alternative investments a sound investment choice for
some DB plans. Individual investors in retirement savings plans
typically have neither the access nor the expertise to invest in these
types of assets.
Because of these three effects--lower fees, professional and pooled
investment management, and access to more sophisticated diversification
strategies--it should not be surprising that professionally managed DB
plans consistently outperform individually managed DC plans. One widely
cited estimate from Munnell and Sunden (2004) puts the difference in
annual return at 0.8 percent. Over a 30-year time period, this
compounds to a 25-percent difference in total return. A 2007 report
from the global benchmarking firm, CEM, Inc., concluded that between
1998 and 2005 DB plans showed annual returns 1.8 percentage points
higher than DC plans, largely due to differences in asset mix (Flynn &
Lum 2007). And Watson Wyatt (2008) found that between 1995 and 2006 DB
plans outperformed DC plans by 109 basis points, on average.
The benefits of risk pooling
DB plans create additional economies for participants and plan
sponsors by pooling mortality and other risks. By pooling the mortality
risks of large numbers of people, DB plans need only accumulate assets
sufficient to fund retirement benefits over the average life
expectancy. By contrast, in a DC plan based on individual savings
accounts, more assets will be required. Because an individual does not
know what their ultimate lifespan will be, it is extremely difficult to
know exactly how much one needs to save for retirement and to be
certain that one will not outlive those savings. Thus, in a system of
individual accounts, each person must ensure that he or she accumulates
enough savings to last for the maximum lifespan. Thus, a DB plan will
require fewer assets to be accumulated than a comparable DC plan,
reducing costs by 15 percent to 35 percent (Fuerst, 2004).\2\
---------------------------------------------------------------------------
\2\ Employers that offer individual retirement savings plans could
come close to approximating these economies by offering annuity
distribution options. In practice, however, it is the rare plan that
does so (Perun 2007).
---------------------------------------------------------------------------
To summarize, state and local DB pension plans provide taxpayers an
excellent ``bang for the buck.'' DB plans possess several sources of
economic efficiencies when it comes to delivering retirement benefits.
They combine the effects of lower fees, professional management, more
sophisticated diversification strategies, and risk pooling. Actuaries
have determined that DB plans are much more efficient than DC plans and
that they provide retirement benefits at a far lower cost (Fuerst 2004;
Waring and Siegel 2007). Thus, to the extent that public retirement
systems are supported (at least partially) by taxpayer funds, a DB plan
design for state and local retirement systems supports the goal of
fiscal responsibility.
conclusion
My review of the economic evidence on state and local DB plans
tells the story of a thriving, well-designed system. State and local DB
pension plans have been remarkably successful in providing adequate
benefits to public sector retirees in a sustainable and efficient
manner. Their proven performance makes these plans a model to emulate.
DB plans in the public sector incorporate the features policymakers
should look for in successful retirement systems: broad-based coverage,
secure money for retirement, portability, shared financing, lifetime
benefits with spousal and disability protections, professional
management of assets, and low costs and fees.
Public sector DB plans have been highly successful in ensuring that
the millions of middle-class Americans who work in service to the
public have the resources they need to take care of their own needs in
retirement. They provide modest benefits that retirees can count on to
last as long as they do.
And public DB plans serve taxpayers and public employees alike with
their cost-effective structure. The sustainability and efficiency of
public sector DB plans hinge on the pooling of assets and risks. By
pooling assets, DB plans can benefit from professional management which
drives down costs and enhances return. By pooling longevity risks, DB
plans reduce the cost of providing retirement benefits even further.
The lessons that we can learn from the experience of DB plans in
the public sector can and should be applied to private sector
retirement savings. This is particularly true for the design of DC
plans. Much is already done in this way to make saving in these plans
more automatic, increase its coverage, and secure its assets. In the
end, though, much of what public sector DB plans can offer will be hard
or impossible to recreate in the DC setting. For instance, mortality
risk will likely remain a feature of DC plans for the foreseeable
future. Hence, policymakers should help strengthen existing DB plans,
in the private and public sector. Against the backdrop of widespread
and rising retirement income insecurity, models of strong retirement
security are rare and yet desperately needed.
references
Almeida, B. 2008. ``Retirement Readiness: What Difference Does a
Pension Make?'' Issue Brief Washington, DC: National Institute on
Retirement Security.
Almeida, B., K. Kenneally, and D. Madland. 2008. The New Intersection
on the Road to Retirement: Public Pensions, Economics, Perceptions,
Politics, and Interest Groups. Submitted to the Pension Research
Council, The Wharton School, University of Pennsylvania.
Austin Business Journal. 2008. ``Poll reveals Americans feel ill-
prepared for retirement.'' June 23.
Baker, D., and D. Rosnick. 2008. ``The Housing Crash and the Retirement
Prospects of Late Baby Boomers.'' CEPR Report. Washington, DC:
Center for Economic and Policy Research.
Benartzi, S. and R.H. Thaler. 2007. ``Heuristics and Biases in
Retirement Savings Behavior.'' Journal of Economic Perspectives 21
(3): 81-104.
Blake, D. 2000. ``Does it matter what type of pension scheme you
have?'' The Economic Journal 110 (461): F46-F81.
Board of Governors, Federal Reserve System. 2008. Release Z.1 Flow of
Funds Accounts of the United States. Washington, DC: BOG.
Boivie, I. and B. Almeida. 2008. ``Patience is a Virtue: Asset
Allocation Patterns in DB and DC Plans.'' NIRS Issue Brief
Washington, DC: National Institute on Retirement Security.
Brainard, K. 2007. ``Public Fund Survey Summary of Findings for fiscal
year 2006.'' National Association of State Retirement
Administrators and National Council on Teacher Retirement.
Brainard, K. 2008. ``Redefining Traditional Plans: Variations and
Developments in Public Employee Retirement Plan Design.'' Prepared
for presentation at the Pension Research Council Symposium, May 1-
2, 2008.
Council of Institutional Investors. 2006. ``Protecting the Nest Egg: A
Primer on Defined Benefit and Defined Contribution Retirement
Plans.'' Washington, DC: CII.
Flynn, C., and H. Lum. 2007. ``DC Plans Underperformed DB Funds.''
Toronto, ON: CEM Benchmarking, Inc.
Fuerst, D. 2004. ``Defined Benefit Plans: Still a Good Idea?'' AARP
Global Report on Aging. Washington, DC: AARP International.
Holden, S. and J. VanDerhei. 2001a. ``401(k) Plan Asset Allocation,
Account Balances, and Loan Activity in 2000.'' EBRI Issue Brief
239. Washington, DC: Employee Benefit Research Institute.
Indjic, D. and F. Partners. 2002. ``Strategic asset allocation with
portfolios of hedge funds.'' Alternative Investment Management
Association Journal (December): 29-33.
Love, D. A., P.A. Smith and L. McNair. 2007. ``Do Households Have
Enough Wealth for Retirement?'' Finance and Economics Discussion
Series. 2007-17. Washington, DC: Federal Reserve Board,
Mitchell, O. and S. Utkus. 2004. Pension Design and Structure: New
Lessons from Behavioral Finance. New York: Oxford University Press.
Munnell, A. H., A. Webb, and F. Golub-Sass. 2007. ``Is There Really A
Retirement Savings Crisis? An NRRI Analysis.'' CRR Issue in Brief
No. 7-11. Boston: Boston College, Center for Retirement Research.
Munnell, A. H. and M. Soto. 2007. ``State and Local Pensions are
Different from Private Plans.'' Center for Retirement Research
State and Local Pension Plans, No. 1. Boston College.
Munnell, A. H. and A. Sunden. 2004. Coming Up Short: The Challenge of
401(k) Plans. Washington, DC: Brookings Institution Press.
Phillips, K.S. and R.J. Surz. 2003. Hedge Funds: Definitive Strategies
and Techniques. New York: John Wiley & Sons.
Purcell, P. 2007. ``Pension Sponsorship and Participation: Summary of
Recent Trends.'' CRS Report RL30122. Washington, DC: Library of
Congress, Congressional Research Service.
Seco, L.A. 2005. ``Hedge funds: Truths and myths.'' Revista de Economca
Financiera 6: 82-114.
U.S. Census Bureau. 2008. ``State and Local Government Employee
Retirement Systems.'' Washington, DC: Census.
Watson Wyatt. 2008. ``Defined benefit vs. 401(k) plans: Investment
returns for 2003-2006.'' Watson Wyatt Insider 18(5).
Waring, M. B. and L.B. Siegel. 2007. ``Don't Kill the Golden Goose.''
Financial Analysts Journal 63 (1): 31-45.
Weller, C. 2006. ``The End of the Great American Housing Boom.'' Center
for American Progress Economic Policy Report. Washington, DC:
Center for American Progress.
Weller, C., and S. Jenkins. 2007. ``Building 401(k) Wealth One Percent
at a Time: Fees Chip Away at People's Retirement Nest Eggs.'' CAP
Economic Policy Report. Washington, DC: Center for American
Progress.
Weller, C., M. Price, and D. Margolis. 2006. ``Rewarding Hard Work:
Give Pennsylvania Families a Shot at Middle Class Retirement
Benefits.'' CAP Economic Policy Report. Washington, DC: Center for
American Progress.
Weller, C., and J. Wenger. 2008a. ``Robbing Tomorrow to Pay for
Today.'' CAP Economic Policy Report. Washington, DC: Center for
American Progress.
Weller, C. and J. Wenger. 2008. ``Prudent Investors: The Asset
Allocation of Public Pension Plans.'' Unpublished manuscript.
University of Massachusetts Boston.
[GRAPHIC(S) NOT AVAILABLE IN TIFF FORMAT]