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Kennedy: What lies ahead for PERA

Posted by Jan 24th, 2011.

Cary Kennedy served as Colorado State Treasurer and a member of the PERA Board of Trustees from 2007 to 2010.  She helped develop SB 10-001.

The economic downturn has drawn much attention to the long-term liabilities of public pension funds and how to pay for them.  In 2000, more than half of the states including Colorado had fully funded public pension plans.  By 2008, the number with fully funded plans had shrunk to only four.

Responding to this unprecedented drop, some states, including Colorado, took steps to shore up the solvency of their pension funds.  Last year the Colorado legislature raised the retirement age, increased the required contributions for employees and employers in PERA and reduced the cost-of-living increases for current and future retirees. Today Colorado PERA is 69 percent funded and, under the new law, its funding level will improve steadily over time, reaching fully funded status in 30 years.

But even with these changes, some argue that Colorado simply cannot afford to keep a defined-benefit pension system.  By 2018, the State of Colorado and every school district will pay more than 20 percent of its payroll into PERA. While some of this will come from foregone wage increases, it will put extraordinary pressure on cash-strapped governments, especially school districts that are already under-funded.  These long-term pension obligations could also hinder districts’ ability to fund education reforms which call for rewarding great teachers earlier in their careers.

On the other side of this dialogue are public employees, including teachers, who over time have consistently earned less and saved more than their private-sector counterparts to pay for their retirement security. PERA members put aside 8 percent of their salary every year, far more than the average private-sector worker. Most do not contribute to Social Security, so the PERA benefit is their primary income in retirement. Today over 80 percent of PERA benefits come from member contributions and investment earnings – not taxpayers.

Research comparing public and private compensation levels that takes into account educational attainment shows public workers earn 11 percent less on average than their private-sector counterparts.  Long-term retirement security for Colorado public employees is necessary to attract and retain talent and make up for years of lower pay.

It is also important to consider that PERA plays a huge role in Colorado’s economy. PERA pays $2.5 billion annually to over 70,000 retirees living in Colorado.  In many areas of Colorado, PERA benefits account for more than 10 percent of the earned income in that community.  Every hairdresser, coffee shop and auto dealer in Colorado has customers spending PERA benefits. This steady stream of retirement income spent in every county and on every Main Street in Colorado becomes even more important when the economy is in recession.

In the end, the debate over PERA and the defined benefit pension system will likely be less about politics and more about economics.  Today, nearly 60 percent of PERA’s investment portfolio is in global equities of which nearly 30 percent is invested outside of the United States.  If the world economy dampens, the state and local governments in Colorado will simply not be able to pay more to make up for further market losses.  However, if the global economy grows as it has over the past 25, 50 and 100 years, PERA’s investment earnings will provide economic stability for hundreds of thousands of future Colorado retirees and serve as an important economic stabilizer without busting the bank of the state and local governments.

Let’s hope for the latter.

Popularity: 50% [?]

11 Responses to “Kennedy: What lies ahead for PERA”

  1. Chad Hauser says:

    Let’s not forget that TABOR has helped to create many of the budget issues in this great state. Because of CO incredible rules concerning amendments to our constitution, TABOR is here to stay forever! And how many states have now adopted TABOR after seeing our great success story? Well consider that CO is almost last in the percentage of pregnant women receiving prenatal care, near the bottom for funding for higher education, and almost last for the percentage of low-income non-elderly adults with health insurance. And for such a rich state (we have high median income levels compared to others) we are just pitiful in per pupil spending in education.
    The answer to my earlier question is no states. Coloradians will have to pay higher taxes to continue with our standard of protection (police), education (things like PERA), and living (our many beautiful parks and highways).
    To get back on the topic, no one will stay in teaching without the promise of a defined benefit retirement. Absolutely no one.

  2. gerald keefe says:

    It all comes down to whether PERA can make an annualized return of 8 percent that’s the multi billion dollar question. Some say yes look at the historical return of markets over time. However others say no way with the Congressional Budget Office predicting that GDP growth will only be 2.2 percent a year over the next 20 years making an 8 percent return highly unlikely.

    I say I have no clue.

  3. I have a friend who is a retired public school teacher. I am concerned about the statement, “Most do not contribute to Social Security, so the PERA benefit is their primary income in retirement.” He contributed also to Social Security, working other jobs besides teaching before, during, and after his teaching career; and yet in retirement he has only been allowed to access PERA, being told he cannot have both Social Security and PERA. How cruel is this?!

    • Wes Miller says:

      This is not entirely true. PERA retirees get a reduced SS benefit – sometimes, a drastically reduced SS benefit, but there’s a minimum amount that your friend should still get. I think the minimum turns out to be around $315 monthly.

  4. Paul Mueller says:

    Check out this graphic and short explanation about state pension funds in general:

    http://mercatus.org/publication/states-real-liabilities

  5. Kathy Hansen says:

    Dear Stephanie,
    Very.

  6. Derec Shuler says:

    There are a few things that don’t make for a good comparison to the private sector. State employees may pay 8% for the retirement while the rest of us pay 7.8% for social security. PERA is a defined benefit plan meaning you get certain defined benefits regardless of cost while those of us on social security will receive a check, leaving us to pay for needed services which I expect to cost a lot more than we receive.

    We’re concerned, rightfully so, about PERA being solvent and working to fix it, but the feds aren’t giving social security the same level of attention. As Gerald said, current projection to make PERA solvent require an 8% return indefinitely to reach full funding.

    The plan is currently to pay more into the fund at the expense of future teacher pay increases. I’d bet many new teachers would prefer a higher salary and a 401(k) type solution that’s theirs and portable rather than the current arrangement.

    • Elisa Cohen says:

      I’m not sure how we could transition or why different retirement solutions came into play in the first place, but it seems future generations would all benefit if every employee in the US first and foremost contributed to and counted on Social Security. Unions could then negotiate additional retirement pay and benefits, but if everyone had at the base Social Security, we would all care and direct our representatives to focus on our collective critical need. This would make it all more apples to apples at the end of a long career, regardless of the employer or industry.

    • jeff buck says:

      People have been paying 6.2% to Social Security, not 7.8% and this year it will be 4.2% because of the 2% “payroll tax holiday” included in the compromise bill passed in December. Employees pay 0% for Social Security on all income over $106,800.

      The other 1.45% goes to Medicare which we all pay (at least those of us in the DPS part of PERA do). So we contribute a total of 9.45% for retirement income and health care while those paying into Social Security will contribute a total of 5.65% this year. That’s a big difference.

      PERA is a defined benefit plan because it is a pension. It was intended to be the primary source of income for a retired public employee so it needs to be predictable and adequate. Social Security is a safety net. It was not intended to provide all of a retiree’s income (though it does in many cases).

      I have taught high school financial literacy for a couple of years and I worked on ProComp so I’ve had the opportunity to speak with hundreds of teachers about their income and their retirement. Those experiences combined with my observation of the American public lead me to believe that converting all retirement to a 401(k)/403(b) under the control of the employee would become a national disaster. What in recent financial and economic events makes this still seem like a good idea?

      Most people probably would choose a higher salary now and a defined contribution plan for later. They would go on to buy even more stuff that they don’t really need and devote about as much attention to retirement as they do now (not enough in most cases). Even if they want to pay attention to it, an alarming number of people apparently lack the basic financial skills necessary to stay out of debt, make sound investment decisions, etc.

      I am a strong advocate of personal responsibility but I also believe that forcing a responsibility onto people who are in no way prepared to take it is unacceptable. I also believe that the returns available in the current market to retail investors (like the hypothetical 401(k) owner) do not match the returns available to gigantic corporate and institutional investors. Forcing people onto an uneven playing field is also unacceptable.

      All that said, I agree that 8% returns over time seem pretty far fetched. We have quite a predicament here.

  7. Kathy Hansen says:

    Elisa, I agree with you as well. Few states fail to participate in the SS program, and many local governments allow participation in both programs. All workers should receive SS as a threshold benefit or there will never be a way to compare wages across the board between public and private sectors, not to mention it’s immoral for public employers to leave longtime workers in peril during disability or old age — which can and does occur because non-SS public funds can be cashed out during times of extreme financial need.
    Because workers have contributed lifetime careers to public service in Colorado, they have received a commensurate number of zero’s for SS purposes, so even if both plans were allowed to pay out, the lost SS benefit would have been minimal anyway.
    I am thankful this extraordinary circumstance is finally receiving the press it deserves: public workers contribute lifetime service in exchange for X while the public has little to no understanding of what X really is.

  8. Marilyn Sweet says:

    And , Jeff Buck, I totally agree with you. The 401k is the worst financial disaster to be forced on the average worker. I am very involved with financial planning and most peole have neither the inclination nor the skills to manage a million dollar portfoilio well enough to provide a lifetime income.
    The 401k was device to allow companies to steal pension money fromt he workers.
    Makes my blood boil.

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