Key Facts about Possible Pension Changes- By Bob Samuels

The following report is meant to clarify how the proposed changes to our pension system will affect current and future lecturers and librarians.  I also discuss some of the actions UC-AFT and other groups are taking to protect our shared pension system (UCRP).  Most urgently, UC-AFT is working to delay the Regent's decision on pension reform until complete analysis has been conducted and all UC employees are informed of possible changes.  Please read on.

We now know more about the impact of the pension changes proposed by President Yudof's Post-Employment Benefits (PEB) Task Force.  The implications for your retirement security are significant and very negative.  We believe that the options presented by the PEB Task Force DO NOT serve the interests of our members, as they appear to be driven strictly by an imperative to cut employer costs.  The proposals do not secure adequate funding for the UCRP, which puts the retirement security of all employees at risk.  Further, the plan for new pension tiers that are tied to Social Security income is an unprecedented and highly complex scheme that directs far more retirement income to higher-paid employees, while reducing the benefit available to lower-wage workers by as much as 50%.  Finally, the PEB Task Force has recommended special steps to secure even more pension funding for the most-highly compensated managers and administrators at the University

The University needs to find a way to stabilize the current pension plan by ramping up employer and employee contributions.  We do not need a two-tier system for new hires that is risky and blatantly discriminates against toward low wage workers, while directing even greater pension payouts to the highest-paid people in the system,

Coming Changes in Contributions

If you are already working at UC, the university cannot change most parts of your pension; in fact, the majority of the changes the university is considering are for people hired after 2013.  However, the university can increase the amount we have to contribute to the pension plan, and for librarians and lecturers, this amount is tied to the senate faculty.  In the case of the other UC unions, the university has to bargain the contribution levels, and thus collective bargaining will play a huge role in the future of UCRP.

Currently all employees are paying 2% of salary into the pension plan.  Starting in April 2010, money that had previously gone into a defined contribution plan was redirected into UCRP, so you did not see any change in your take home salary due to the switch.  The next change will occur in July 2011, when unrepresented employees (and people represented by UC-AFT) will contribute 3.5%, and then in July 2012, the contribution level will move to 5%.  These changes already have been approved by the Board of Regents.  Furthermore, the Task Force report on Post Employment Benefits has proposed  to raise the employee contribution to at least 7% in July,  2013; one reason why they want to make this increase in 2013 is that they want to induce people to opt into the new plan (we question the legality of this move).

Changes in Plan Design – The Introduction of a New, Lesser Value Pension

The Post-Employment Benefits (PEB) Task Force has suggested two options for a new, lesser-value tier, and a third option was developed by the Senate faculty and staff members on the Task Force (but not by the larger committee).  These proposals are for people hired after 2013, but current members of UCRP will be able to opt into the new system in July 2013.

For people who are hired after 2013, or for current employees who opt into the new plan, the minimum retirement age would move from 50 to 55 and the age for receiving a full pension calculation would increase from 60 to 65.  Moreover, the two options recommended by the Task Force would reduce some people’s pension allowance by more than 50%.  The task force rationalizes these reductions by arguing that Social Security will make up for most of the losses, but this only means that low- and medium-wage workers will see the greatest reductions. 

What it Means to “Integrate” Social Security with the UCRP

For example, under Options A or B, lower paid employees will receive a disproportionately large share of their UCRP retirement income from Social Security, rather than from the UCRP trust fund, compared to higher paid employees.  In the chart below, the blue columns represent the percent of UCRP retirement income employees at different pay levels will receive from Social Security under Option A or B.  Employees making only $30,000 per year will receive nearly 50% of their UCRP pension income from Social Security and 50% from the UCRP trust fund.  For people at the bottom end of the pay scale, this translates into a very big cut to their over-all retirement income, essentially reducing it by roughly 50% from what it would be under the current plan. In contrast, employees making $130,000 will get 80 % of their UCRP pay out from the trust fund and 20% from Social Security, while those making $200,000 or more will receive even higher percentages of their university pension from the trust fund, because their Social Security income represents proportionately smaller fractions of what UCRP owes them.

It is important to note that social security currently pays a higher benefit to people who make less than $60,000.  Moreover, employees and employers only pay the social security tax on the first $106,000 of wages (this is the anti-progressive aspect how Social Security is funded).  This means that high earners pay a lower wage tax and receive a lower benefit.

The PEB Task Force’s proposed option A and B take into account social security rates by making employees pay a higher contribution rate to the UCRP if they make more than the social security covered compensation level, which is currently $60,000 but will go up to at least $80,000 by 2022. 

One of the problems with the proposed changes then is that they do not take into account that many medium-wage earners will pay a high contribution rate to the UCRP because they will make more than $60,000 when they are working, but by the time they are ready to retire, they will get a reduced pension because they will be making less than the new social security covered compensation level.  In other words, if salary increases do not keep up with the changes in the social security rates, people will pay a high contribution rate for a low pension payout.   

For a very detailed explanation of how the proposed “integration” with Social Security will operate, please see the informative video presentation prepared by the Santa Cruz Faculty Association:

http://ucscfa.org/2010/10/urgent-commentary-on-the-post-employment-benif...

Even More Retirement Income is Proposed to Go to the Highest Earners at UC

Another way that the proposed changes are regressive is that they include a series of special retirement perks for the highest earners. The unions have objected to this redistribution of wealth to the top, and the dissenting task force report called it “unseemly.” It appears that the administration is bent on creating a multi-class salary and benefits structure.  We need to fight this not only because it is unjust, but it is financial suicide.  The PEB Task Force proposals take benefits away from the lowest earners, reduce the overall amount that all UCRP members pay into the pension fund, and hands out an ever greater share to the high-income earners who need it least.

Currently to determine your pension, you need to determine your years of service, the three highest consecutive years of covered compensation, and your age at retirement.  If you retire at 60 and you have 30 years of service, you will get the maximum pension calculation of 2.5%.  This formula is universal to all members of the UCRP.  But under options A and B, this calculation changes according to your salary.  Thus, instead of everyone using the same formula, each wage group will have a different calculation.  Not only will this new system be hard to understand, but it will be difficult to administer.

Also, since the new options all push back the ages for retirement, people who retire before 65 will have a reduced benefit. Moreover, we know that many staff and manual laborers retire in their mid-50s due to physical strain and disabilities, and so a large percentage of low-wage workers will get a severely reduced retirement, and this comes at a time when UC is asking retirees to pay for a higher percentage of their retirement.

None of the proposed pension changes is scheduled to take effect until at least mid-2013. Yet UCOP and the Regents are now on track to adopt these changes by mid-December.   We can only conclude that this rush to judgment by the Regents is an effort to dismantle the traditional benefits of the UCRP before those most affected -- all UC employees -- can learn how the proposed PEB options will impact the retirement security of the present and future workforce of the University.

What to Do

In order to combat these changes, UC-AFT has been engaged on several fronts.  We are participating in a legal challenge to the pension changes, and we are partnering with other unions and senate faculty to stop the proposed plans. A coalition of UC unions (UC-AFT, UPTE, AFSCME, CNA, UAW) has put together a set of shared principles regarding the UC pension system (UCRP).  We plan to present the following at the next Regents meeting November 16-18:

1. Since unions represent 45% of the employees currently covered by UCRP, any changes to our pension plans will have to be accepted by represented workers.  Collective bargaining on proposed benefit changes must precede, not follow, such changes for unrepresented workers.

2.  The Union Coalition of the University of California (UCUC) is united in our rejection of the proposed pension benefit cuts: the second tier and UCRP opt-out/DC plan choice.  The proposed pension changes do not improve the fiscal health of UCRP, are divisive and unfair, and target low- and middle-income workers disproportionately.  Similarly, we reject the eligibility and cost-shifting changes to the retiree health benefit as premature because plans to pre-funding the benefit have not been fully explored.

3. We are willing to consider a plan that would make UCRP more secure and continue its tradition of fair treatment.  We are also willing to consider a plan to prefund the retiree health benefit to maintain the current level of benefits and the current eligibility criteria.

4. Keeping the UCRP adequately funded is the key issue.  We suggest that the university moves quickly to fully funding the normal cost of UCRP in 2011, using employer and employee contributions.  Restarting a higher level of contributions earlier will keep future costs down and capture available funding from the medical centers and contracts and grants.  Total contributions must then gradually increase at levels needed to keep the plan healthy.  Because of currently underfunding, we realize the plan can not to go to 100% funding in the near future, so the goal should be to keep it at healthy funding levels.  Since none of the proposed plans by the task force will reach 100% funding in the next ten years, we believe the university should change its funding policy to reflect this reality.   We support borrowing from STIP if necessary to fund the normal cost in 2011 and beyond.  We request an adjustment of several of the actuary assumptions to more
 accurately reflect current and future employment statistics (i.e. the predicted salary increases, inflation rate).

5. How much of the total contribution is borne by the employee is the subject of collective bargaining.  However, we believe the university should return to the historical ratio between employer and employee contributions (5:1).  Further, any increase in employee contributions should be coupled with salary increases.

6. If the Unions are fully involved partners in shaping funding plans and preserving benefits, we would commit to partnering with UC in Sacramento to secure state funds for the UCRP.

7. We demand joint governance for the pension plan through the creation of a pension board of trustees with equal numbers of current and retired plan participants and Regents or their appointees.  Placing a union representative on the Investment Advisory Board only deals with one, albeit very important, arena of concern.  The Union Representative to the IAB and an alternate must be chosen by the UCUC.

8. To cut costs and promote fairness, the university must eliminate all supplemental retirement for highly compensated UC employees, including the following: The Senior Management Supplemental Retirement Program that puts an extra 5% into retirement savings accounts, along with any plan that would replace it; the 415(m) “restoration” plan that increases retirement income for employees whose UCRP income exceeds $195,000; and 401(a)(17) “restoration” plan that increases retirement income for 200 employees whose salaries are greater than $245,000.

It is clear from these principles that the unions are not just saying no to any new pension changes; rather, we are providing a more effective and fair solution.  The simple fact of the matter is that the proposed changes by the PEB Task force do not address the central problem of funding the shared pension system. 

On another front, several unions (AFT, AFSCME, UPTE, CNA) in consultation with CUCFA and members of the senate faculty welfare committees have put together an additional joint set of principles regarding possible pension changes:

1. We need to move to a full funding of the normal cost of UCRP.  The suggested new tiers do not address this issue.

2. There has to be a credible plan for total remuneration approved by the regents.

3. We must begin paying down the UCRP liability now.  This can be done in part from borrowing from STIP or Pension Obligation Bonds.

4.We need more people paying more into UCRP and not fewer people paying less.

5. There should be a full discussion of alternative plans with the inclusion of faculty, unions, and staff at all levels of the process.

6. We need a plan to pre-fund retiree healthcare.

7. We will work together to get the state to pay its share of the employer contributions.

8. The university should end supplemental retirement packages for Senior Managers.

9. Any changes to the pension plan and retiree health should not discriminate against low- and medium-wage employees.

10. We oppose raising the employee contributions to a high level in order to induce current employees to opt into a new system.

In order to get our positions across we ask you to come to the Regents meeting in San Francisco November 16-18.  You can also write directly to President Yudof and the Regents.