New Jersey Proposes Sweeping Reforms to Public Pensions and Benefits: Without It, Pensions and Retirees' Healthcare Will Cost $8 Billion in 2016 (23 Percent of the State Budget)

Defusing New Jersey’s pension time bomb

March 22, 2015

New York Post - New Jersey is beset by one of the worst government pension problems in the nation, thanks to decades of bad management, deceptive accounting and the continual awarding of higher benefits to workers without adequate funding by Jersey governors and legislatures.

For years, some observers have argued that the New Jersey pension system is so deeply in debt, to the tune of at least $60 billion, that it is beyond saving at a reasonable cost. Now, an expert commission consisting of Democrats, Republicans and independents who were asked by Gov. Christie to examine the issue has agreed.

In a recent report, the New Jersey Pension and Health Benefit Study Commission warned that, “There are no plausible solutions for closing the pension funding gap” in the state without serious new reforms. Trying simply to pay its way out of the current funding mess would require the state to increase its income tax by 29 percent or raise the sales tax to 10 percent, in a state that is already one of the nation’s highest taxed.

Instead, the commission has proposed sweeping changes to ensure workers that a pension system that otherwise could be depleted by the middle of the next decade would have funds for their retirement. The plan would also cut expenditures so that Jersey government, which faces the prospect of devoting virtually all growth in tax revenues to rising benefit costs, could channel some of that money into other budget areas.


Although controversial, the commission’s reform plan represents the best hope for Jersey to dig its way out of a problem that has dogged the state and hampered efforts to turn around its economy.

At the heart of the commission’s plan is a proposal to freeze the current pension system and transfer management of the assets to unions. Workers would retain all of the benefits they have earned, but the system would stop piling up new obligations. The state would commit to paying off the system’s debt over decades, so that the plan would have money for future retirees.

The commission’s reform plan represents the best hope for Jersey to dig its way out of a problem that has dogged the state and hampered efforts to turn around its economy.

At the same time the state would create a new, less expensive retirement system, known as a cash-balance plan. Government would make regular contributions into the plan based on a percentage of a worker’s salary, and that money would grow over the years thanks to modest projected investment returns.

When workers retire, they would receive the money saved in their names, either in the form of a cash payout, or as an annuity that would pay them a regular monthly income for the remainder of their lifetime.

But that payment would be based on how much money had accumulated in the worker’s name, not on some formula based on an employee’s years of service.

Some of the money to pay for this plan would come from asking workers and retirees for greater contributions toward their health plans. Whereas the best plan under ObamaCare, the Platinum plan, picks up 90 percent of an insured person’s costs, Jersey public employees typically have plans that pay up to 95 percent.

Workers continue to receive health coverage after they retire — something rare in the private sector. As a result, the average government worker who retires before he becomes eligible for Medicare costs the state $26,000 a year in family health insurance. The plans are so expensive, and increasing in cost so rapidly, that they could be subject to ObamaCare’s new “Cadillac tax” in 2018.

By contrast the reform commission aims to provide Jersey workers with health insurance that matches what the largest private employers in the state provide, in which the insurer pays about 80 percent of costs.

The bottom line of the plans would be $2.9 billion in annual budget savings. Without reform, pensions and health care alone would cost $8 billion next year, 23 percent of the state budget. Legislators would also ask voters for a constitutional amendment to require Trenton to contribute annually toward paying pension obligations. No longer would legislators be able to woo political support from unions by promising them new benefits without paying for them immediately.

A few union leaders have agreed to negotiate on the broad outlines of the recommendation, though there are numerous details to be worked out. Those willing to come to the table recognize that there is no easy way to tame a debt monster that threatens to consume ever more tax dollars.

But other leaders and the legislators who rely on their support are balking, telling the state to simply pay up without explaining where the money would come from. There’s only one answer to that question: It would have to come from taxpayers. But they can’t afford that huge bill.