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Saturday, January 6, 2018

The NJ Pension Crunch

I'm not complaining about my future pension (well not too much). I know I'm lucky to have it. A paycheck for life that I'm eligible for at 60 with 25 years of service. I'll take it. Even if it isn't what it once was, or even currently is. I know many private sector employees would love a pension, even the third least generous pension in the state. I'm fortunate enough to be in a financial situation that allows me to plan outside of my pension. But like many state employees today, I am feeling the pension crunch.

Being part of a state pension system these days is both a blessing and a curse. Especially the NJ Teacher Pension and Annuity Fund. By now the story is almost famous once upon a time over 20 years ago, the government borrowed from a pension surplus to balance the budget, and then didn't contribute to the pension for nearly two decades. The result the pension isn't solvent and is the 3rd least generous in the nation. The result for all NJ Employees (but in my case I'll focus on the educators fund) contribute more and more, in order to receive less. The state has kicked in a ton of money which has stressed it's budget, and is still unable to contribute enough to close the gap. Do the math NJ workers. Your going to be paying more for less.

At the same time healthcare costs have ballooned out of control and for state workers percentage of their healthcare cost increases with every $5,000 of salary. I've had my take home pay decrease in a year because I crossed a healthcare salary threshold.

I only mention this because typically when you look at retirement numbers the more you contribute the better off you will be. But that is not the case with the pension system. Don't get me wrong I'm not complaining. If the pension is still there. It's nice to be able to have a salary for life. But the fear is where is the money coming. Here is a look at the contribution numbers in recent years.

TPAF Percent of salary contribution numbers

2004 5%
2005 5.5%
2011 6.5%
2012 7.5% (phase in over a 7 year period)

And this number is likely to increase further. The state treasurer cut the percentage the state can assume it will make on it's investments from 7.65 percent to 7%. This adds to the pressure for pension reform and increased contributions.

This is frightening to the average worker that may be asked to contribute close to 10 percent of their salary for an uncertain benefit. Oh and sorry for those of you that were hired after me. Your contributions are the same. But your benefit is even less. You will be working even longer for less.

If you were enrolled in the system in before July 2007 You can retire at 60. Your benefit is calculated as the average of your final 3 years of salary/55.

Hired after June 28, 2011 and you have to work until 65 and it's the average of your final 5 years salary/60.

It is essential that NJ employees plan to save outside of their pension fund. But many are feeling the squeeze in pension, healthcare, salary caps, and on the other side as taxpayers. I know for a fact many educators aren't able to save outside of their pension plan. Many of those that are, aren't saving enough.  I have heard from 40 somethings that have been saving $50-100 per paycheck.  What's worse is that those that are saving mostly do what's easy; speak to the 403(b) representatives that prey on teachers in the faculty rooms. In one sense these representatives are doing the teachers are service. They are visiting them and getting them to save early and often. But it comes at a cost -- Many 403(b) funds available to teachers have high management fees and mediocre performance that eat into the bottom line.

So the message to NJ state employees is this. Have a backup plan. Whether it is being frugal, a side gig, you need something. Save early, save often and be savvy about where you put your money. The fees and the quality of the investments matter. For me it's been the dividend fund I blog about and a Roth IRA. But you have to find what works for you.


Material presented on 'Dividend Seedling' is for informational and entertainment purposes only and is the opinion of the author (a social studies teacher and not a financial advisor). None of the information should be relied on or taken as investing advice or a recommendation to invest. None of the information or opinions expressed, constitutes a solicitation of the purchase or sale of any security or investment of any kind. Please do your own research before making any investments. Do not making any purchases unless you are prepared to lose your entire investment.

Additional Disclosure I long everything.


  1. This is true for every state in the US. We have underfunded pensions all around. I feel that the ROI assumption is BS (sorry for the language). Even 7.65 percent to 7% is not sufficient. It is better to assume a lower return and if excess wealth is created then that can be used by state for it's expenses. I think 4% is a more appropriate ROI assumption. That does mean the pensions need to be funded more. This could cause a negative bankruptcy. How to fix this? Make pensions more realistic.

    I am happy that you have a pension. But, with our current system it is had to guarantee it's existence. So plan your retirement without taking into account your pension. Use the additional money to splurge or make the world better :-)

  2. Not so sure about a 4 percent ROI. I agree there needs to be more concessions on the part of the workers. But the state needs to do its part too. I'm definitely not planning on using my pension. I saved a a little with my 403b. I'm putting away decent money between ROTH and DGI accounts. But not everyone is in my situation. About 15 years ago state almost required a graduate degree to teach (aka more loan debt). Then they cut the pension, added healthcare payments, created salary freezes, asked for additional worker payments. I agree the worker has to kick in more. But at some point it's water from a stone. The state can't continue to dodge their obligations.

  3. Not a bad advice Seedling. I think it's always good to have multiple income streams as it is rarely a good idea to put all your eggs in one basket. So, if something were to happen to your pension, you have another source of income to fall back on.

  4. Absolutely. I've seen horror stories where people work their whole lives and have their pensions cut in half. I would definitely rather have it and not need it, than need it and not have it.


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