[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










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                        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.

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          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.

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     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.
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    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
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    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.
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