Open letter on ORP inequities from Bownik in Math

4/8/2013: Update: Marcin asked me to move this to the top of the blog, in case people had additional comments.

3/22/2013: Dear Union Bargaining Team,

I would like to raise your attention to enormous inequity in ORP retirement contribution rates between two different tiers of university faculty. I think this should be a subject of bargaining negotiations, e.g., a part of the union salary package. There has been a UO senate resolution last fall, see:
These rates can be found see page 8 in Decision Making Guide available at OUS website:
In short, the inequity between tier 1/2 (all those hired before 2003) and tier 3 members (hired in 2003 until now) is ENORMOUS and it will be even BIGGER starting in July 2013.
Currently (until June) Tier 1/2 members are getting 16.14% employer contribution, whereas Tier 3 members get 6.21%. In July, Tier 1/2 will be getting 20.90%, whereas we tier 3 will experience a minimal gain to 6.42%. That is, Tier 1/2 will be getting 14.48% more of their TOTAL salary toward retirement than Tier 3. Fortunately for Tier 3 members the university pays 6% employee contribution for all tiers. However, “the 2013-2015 Employee Contribution rate is subject to legislative, executive, management or collective bargaining action”. So we cannot be sure of that.
I think this is shockingly unfair and something has to be done about it. Note that 14% difference in total compensation package (salary+benefits) is much more than the salary raises we can dream of in the next few years.
Do you think anything can be done to reduce this enormous inequity?
Best regards,
Marcin Bownik (Math)
3/21/2013

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32 Responses to Open letter on ORP inequities from Bownik in Math

  1. Anonymous says:

    The only thing would be to withhold any compensation increases from Tier 1/2 participants until Tier 3 employees are receiving 14% more compensation than they are now. Most people are willing to take less to prevent others from receiving more. Thus, relative equity is more important to most individuals that individual reward maximization. But the Tier 1/2 participants believe they are entitled to what they are receiving and any increases received by Tier 1 participants. Simply saying the university should come up with 14% will never bridge the gap that you have identified as being unfair. There is the rub. Malthus

    • Marcin says:

      Dear Anonymous,

      This issue is not about “preventing others from receiving more”, but about fair compensation in the form of retirement contribution rates.

      The current ORP system needs to be reformed.

      First, the contribution rate in the defined contribution plan (ORP) is linked to defined benefit plan (PERS). This by itself might not be that bad if not the PERS reform in 2003 which introduced a new tier 3. Because of this linking it automatically created a new contribution rate for ORP members hired in 2003 and after. Even IRS has a problem with that, since 401(a) plans must have determinable contribution rate. The quick fix is creating a new tier 4 (starting in 2014) which will be a true defined contribution plan unlike what we have now.

      Second, this linking can be removed by the legislative action. In fact, OUS tried to do this back in 2006 and 2007, but there was a resistance from tier 1/2 ORP members. The reform didn’t happen and I don’t know whether it has a chance to happen or not. Who would willingly give up nearly 27% retirement contribution rate?

      Third, currently employee contribution rate of 6% is paid by the university. This is not guaranteed and it could be subject to collective bargaining action. Perhaps this rate could be increased for tier 3 members (and possibly decreased for tier 1/2 to make it cost neutral)? Note that tier 1/2 will already be getting nearly 5% increase in their contribution rate, so they wouldn’t be hurt by that.

      Finally, I have observed a big correlation how people react to this problem based on their personal tier status. Could you identify yourself (at least your tier status) to have a meaningful conversation?

      Best regards,
      Marcin

    • Anonymous says:

      I’m Tier 3. I have no quarrel with your third idea. I predict the T/2 employees (and UA) will. Malthus

    • Anonymous says:

      I’m sure this is obvious to you, but is the objective standard by which you have concluded that this situation is inequitable based on the principle of equal pay for equal work? Is being hired after a specific date the equivalent of race, sex, religion, national origin, age, or sexual orientation? If not, why does that principle apply? Malleable

    • Marcin says:

      Malleable,

      I do not pretend to be making a legal argument, but the closest would be the principle of equal pay (in this case retirement contribution to 401(a)) for equal work. I can understand some differences are unavoidable. However, the situation in which faculty member A, who was hired in 2002, gets 27% retirement contribution, whereas faculty member B, who was hired in 2003, gets less than 13%, is definitely inequitable.

      I am sure this situation is perfectly legal though it is totally ridiculous from the standpoint of fairness. Note that we are talking here about defined contribution plan (ORP) versus defined benefit plan (PERS). The promised benefits in PERS can not be changed as it was attested by courts. In ORP there are no promised benefits—only monthly retirement contributions which you can invest at your choice and do with them what you want (as long as you follow IRS rules).

      Marcin

    • Anonymous says:

      Marcin,

      I will confess to playing the Devil’s Advocate here, but isn’t (admittedly poor plan design) the deal we accepted when we were hired? I am reminded of the Parable of the Laborers in the Vineyard. Is it unfair to the laborer who works all day for one sheckle that the laborer who works only the last hour is also paid one sheckle?

      Malware

    • Marcin says:

      Malware,

      Yes and no. ORP plan can be (and should be) changed to reduce differences between castes of laborers. I don’t think ORP was badly designed initially. It has become so after the reform of PERS in 2003 as one of its unintended consequences.

      Tier 3 ORP members should simply be more vocal and demand the change of the ORP plan to make it more equitable. Who says it should stay the same?

      Well, actually AOF (Association of Oregon Faculties) said that, see:
      http://www.oregonfaculties.org/issues/retirement.shtml

      However, these were pre-2003 folks who had to fight with another unintended consequence of 2003 PERS reform, but they won. Thus, there is understandably big resistance to change.

      Marcin

    • Anonymous says:

      Marcin,

      Sounds like redistributing the employer-paid employee contribution is an appropriate collective bargaining proposal. The union has the right to balance the interests of different employee groups within the unit in deciding what to propose so long as it does not discriminate for invidious reasons. Have you considered soliciting petition signatures in support of this concept?

      Maltreated

    • Marcin says:

      Maltreated,

      No, I haven’t thought about starting a petition. I don’t have any experience doing it. At this moment I think it is important for as many people as possible to be aware of this inequity. You would be surprised to see how few people are actually aware of the existence of this huge inequity.

      Marcin

  2. Anonymous says:

    I don’t think United Academics is in a position legally to constrain PERS policies through the CBA.

  3. Awesome0 says:

    They are more underpaid relative to comparator AAU’s etc by rank. So perhaps that implies the equity pools should be divided up closer to evenly among Associates and Fulls (or equivalent tenures among NTTF).

    This does bring up a bigger issue. If we are focused on compensation now, and say nothing about deferred compensation, could we get screwed. For instance, they grant the raises asked for but get rid of paying the 6 percent employ compensation.

    Or if we get an independent board, and the board controls the university assets, if the UO is not a “state agency” as has been referred to in some of the recent legislation, good bye PERS, then the board takes the implied investments in PERS and does whatever they want with as they have control of the UO assets, and presto they give us whatever crappy retirement plan they want to use to replace PERS.

    This sort of thing has happened before in private sector mergers, as my fathers company pension was put in an IRA account accruing 0.8 percent in interest every year until he left. That’s worse than a savings account. Maybe we should be paying closer attention to the independent board legislation and how that might interact with the economic proposals of the union.

  4. Anonymous says:

    I’ve been here for 25 years, and lost hundreds of thousands in pay for it. If the union wins on salaries, I’ll collect those raises for a few more years until I retire. The PERS benefits are my compensation for the years of bad pay.

    If the union plan works, the assistants and associates will get raises for a good chunk of their working lives. So I think the tier 3’s should work to make sure they get equitable salaries and not mess with the retirement issue.

    Tier 1, of course!

    • Marcin says:

      Dear Anonymous,

      Since you are in PERS rather than ORP, this issue does not apply to you at all. In defined benefit plan (PERS), your future benefits are secure. The discussion is about contribution rates to the parallel defined contribution plan (ORP) which gives monthly contributions to a retirement account of each individual member who then chooses how to invest these funds.

      Marcin

  5. Anonymous says:

    Even our dept chair like to pretend that this difference doesn’t exist. I’ll be surprised if anyone does anything about it.

  6. Jonathan says:

    The ORP rates are divergent (as are PERS benefits) for the different tiers. But it’s worth noting that total compensation for senior faculty, including pension benefits, still lag behind junior ranks, when compared to UO comparators. I believe it is the case that UO administration has deliberately taken the Tier 1 pension benefits into account in holding back senior faculty salaries.

  7. duckgoose says:

    Can someone explain why the contribution levels are increasing? Is all the money of the increased amount going to the faculty member, or is it a mechanism to put money into the Tier 1 fund as it falls behind the guarantees?

  8. Marcin Bownik says:

    Duckgoose,

    Contribution levels for tier 1&2 are increasing because PERS is heavily underfunded _and_ ORP contribution rates are linked to PERS rates. For example, a faculty member A, who was hired in 2002, will get nearly 27% contribution to his/her individual retirement fund. On the other hand, a faculty member B, who was hired in 2003, will get only 12.5% to his/her retirement fund.

    And yes, all of these funds go to individual retirement accounts versus a general PERS fund.

    Marcin

  9. Marcin Bownik says:

    Jonathan,

    Yes, I agree that “that total compensation for senior faculty, including pension benefits, still lag behind junior ranks, when compared to UO comparators”. However, this argument is only half true.

    Take as an example tenure-track faculty hired in 2003. Several of them are already full professors. The rest are associate professors who can soon become full professors. These are hardy “junior faculty”. Yet, their total compensation lags far behind those who were hired merely one year before (due to totally different retirement contributions).

    So it is very difficult (in my opinion it is impossible) to have any reasonable explanation why the ORP are so divergent.

    Marcin

  10. duckgoose says:

    Thanks, Marcin. The part that doesn’t make sense to me is that contributions to individual accounts would be increased because PERS is underfunded. But I understand that things don’t always make sense. Is there some official reason for linking individual contributions to PERS fund fiscal health? What controls the TIer 3 rates?

  11. uomatters says:

    It may or may not make sense, but it’s currently the law:

    243.800(9)
    The State Board of Higher Education shall contribute monthly to the Optional Retirement Plan the percentage of salary of each employee participating in the plan equal to the percentage of salary that would otherwise have been contributed as an employer contribution on behalf of the employee to the Public Employees Retirement System, before any offset under ORS 238.229(2), if the employee had not elected to participate in the Optional Retirement Plan.

  12. Jonathan says:

    Marcin, I agree that faculty rank does not completely take care of the disparity, and as time goes on, this is increasingly the case.

    The ORP rates are set in stone by law, though, according to which tier one is in (i.e. when one was hired). See uomatters post nearby.

    In my opinion, it would be appropriate to take into account pension benefits (and other compensation besides salary) in setting salaries, raises, etc. Whether this would be legal to do formally, I don’t know. And whether the new union would go along with it, I don’t know at all.

  13. Jonathan says:

    Marcin, I would also say that what is good for the goose is good for the gander. Would you be willing to have your salary reduced, in recognition that junior faculty are better-salaried (relative to peers) than are Tier 1 and Tier 2 senior faculty?

  14. Jonathan says:

    I’ll make another comment about this. Marcin, what you should be looking at is total compensation relative to peers. By this criterion, Tier 3 junior faculty are better off than Tier 1 senior faculty.

    If you really want a better retirement package, here’s how to do it: put more of your total compensation into retirement. You can do this by signing up for the tax deferred investment part of the retirement program. Start socking away, say, 10% more of your salary for retirement when you’re young, invest it wisely, and bingo! when you’re of retirement age, you’ll be amazed how much money you have.

    In effect, Tier 1 PERS people were forced to do the equivalent of this. Some of them will tell you how much they wished when they were younger that some of that reitrement contribution couldn’t go for house payments, or car payments, or tuition for their kids. Then, when they got older, they were amazed to learn how much their PERS pensions would be. And in retrospect, they weren’t too unhappy. But it’s always easier to use 20-20 hindsight.

  15. Marcin Bownik says:

    Jonathan,

    I will agree with your assessment of Tier 3 junior faculty versus Tier 1 senior faculty. However, there exists a category of Tier 3 senior faculty (or soon to be senior) faculty. To be clear by senior faculty I mean simply full professors. If you prefer another definition, then let me know.

    What about these category of Tier 3 senior faculty? They will only increase in its size and yet its total compensation package is already lower than that of Tier 1 & 2 senior faculty. Do you have any suggestion how to bridge compensation gap between these two groups of senior faculty?

    Note that setting aside 10% of your salary to TDI will not change the situation a bit, i.e., total compensation (salary+benefits) remains the same.

    Best regards,
    Marcin

    P.S.

    Regarding Tier 1 PERS members. A you know PERS is heavily underfunded because the past contribution rates were too low to cover promised benefits (and the investment returns were unrealistically high). To cover this huge deficit current Tier 1 and 2 PERS members have much higher contribution rates than the benefits they will get in the future. This is OK, since PERS is a defined benefit plan after all. The winners in this situation are Tier 1 & 2 ORP members. Unlike PERS members, all of their contributions go into individual retirement accounts. It is really a great deal to have more than 1/4 of your total salary paid to the individual retirement account. I don’t know of any US university who would do be so generous and I looked at many.

  16. Marcin Bownik says:

    Jonathan,

    Thanks for your remarks. You have suggested a possible way to alleviate this disparity though I doubt there are many brave people to acknowledge that this is a real problem and then seek a solution.

    Though ORP rates are linked to PERS rates, my understanding is that this can change in the future. In fact, Oregon University System (OUS) has tried to introduce delinking of PERS and ORP in the past. But there was always a powerful resistance to this.

    It seems that they finally succeeded with this, but only for the future members (hired in 2014 and after). There is no change for existing members despite such huge disparity in contribution rates. What can you do about?

    Marcin

  17. uomatters says:

    I agree that Tier 3 PERS have a substantially worse deal than Tier 1 PERS, and that the same is probably true when comparing Tier 1 and 3 ORP.

    But is it really true that Tier 1 ORP has a better deal than Tier 1 PERS?

  18. Marcin Bownik says:

    At this instant one can argue that Tier 1 ORP is better than Tier 1 PERS, and more certainly Tier 2 ORP is even better than Tier 2 PERS. This is because current PERS members contributions go in big part to underfunded PERS fund to pay current retirees, whereas ORP members retain all of these contributions in individual accounts.

    The other way one can see this is to notice that Tier 3 PERS benefits are not that much worse than Tier 2 PERS. From the top of my head I remember that in Tier 3 PERS gets slightly lower credit for each year of service (versus that of Tier 2) for computing the defined retirement benefit. Nothing that a huge discrepancy in rates would explain.

    Finally, why would tier 1 & 2 contribution rates increase now and not for tier 3? Answer: to pay obligations which PERS needs to make. That’s why ORP Tier 1 & 2 at this instant is a better deal than PERS, but this answer depends also on the future. Will you work at UofO until retirement? How long will you live? Etc…

  19. Miss Trust says:

    Marcin, You ask “Can anything be done to reduce this enormous inequity?” And I am afraid that the answer the commenters are driving towards is that Tier 1/2 employees should have their retirement contributions reduced. I have Tier 2 ORP (clearly a better choice than PERS at the time). I was a trailing spouse and the salary I received was insulting – less than 2/3 what I had made at my previous job. It was only the generous retirement contributions and excellent medical plan (which has deteriorated) that made our job offers from UO competitive. I agree with a previous commenter that the retirement money has made up for years of low salary. The answer to your question is not to lobby to reduce your colleagues benefits. You will only anger and alienate us and ultimately drive UO towards mediocrity. The answer is to find a way to compensate all employees for what they are worth and be able to make offers to prospective faculty that are competitive.

  20. Marcin Bownik says:

    Dear Miss Trust,

    Thanks for sharing your story. Do you remember what was the employer contribution to ORP when you came to UO “that made our job offers from UO competitive”?

    For most senior tier 3 faculty (including myself) it was 8.04%. Now it is 6.21% and soon it will be 6.42%.

    I don’t see a good justification why there should be such a huge discrepancy between different tiers except that it is a state law. Since tiers are based solely on the date of hire, rather that on merit, productivity, years of service, etc., such law might actually drive UO toward mediocrity rather than excellence.

    Best regards,
    Marcin

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  22. OChato says:

    You all may want to take a look at this:

    http://www.ous.edu/sites/default/files/dept/hr/benefits/files/SB242_ORP_RecommendationReport_2012.pdf

    Committee members included:
    • Scott Beaver, WOU Associate Professor
    • John Chalmers, UO Associate Professor
    • Larry Curtis, OSU Associate Dean
    • Maude Hines, PSU Associate Professor
    • Ron Narode, PSU Associate Professor
    • Ernie Pressman, UO Benefits Administrator
    • Shana Sechrist, PSU Associate Vice President of Human Resources
    • Sandy Smith, WOU Budget and personnel Manager
    • Jay Stephens, SOU Director of Human Resources

  23. OChato says:

    Proposed Tier 4

    You all may want to take a look at this:

    http://www.ous.edu/sites/defau

    Committee members included:
    • Scott Beaver, WOU Associate Professor
    • John Chalmers, UO Associate Professor
    • Larry Curtis, OSU Associate Dean
    • Maude Hines, PSU Associate Professor
    • Ron Narode, PSU Associate Professor
    • Ernie Pressman, UO Benefits Administrator
    • Shana Sechrist, PSU Associate Vice President of Human Resources
    • Sandy Smith, WOU Budget and personnel Manager
    • Jay Stephens, SOU Director of Human Resources

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