By Joshua Sharf
Colorado’s Public Employees Retirement Association (PERA) doesn’t have enough money to keep its promises. Lower investment returns and longer lifespans have shocked a system already made fragile by decades of poor decision-making fed by wishful thinking.
Currently, PERA is 58% funded – down from over 100% funding in 2000. PERA’s own actuarial projections have it declining to less than 20% funding before recovering. Under current plans, it would take nearly 60 years for the State Fund to reach full funding, nearly 80 years for the School Fund.
Therefore, the PERA board has proposed a series of fixes to help the funding ratio, and bring the amortization period back under 30 years.
As with past solutions, they only perpetuate the problem. They also demonstrate the profound unfairness of the current unsustainable defined benefit (DB) structure that the PERA board has fought tooth-and-nail to defend.
Employers – taxpayers – who are already paying upwards of 20% of employee salaries will pay another 2%. Current employees will pay another 3% of their salaries. Cost of Living Adjustments (COLAs) will be reduced and delayed. New employees will retire slightly later.
Employees may see the dollars they were promised, but at the cost of a permanent 3% pay cut. Communities will be forced to divert even more scarce resources into backfilling these promises. It’s a way of “keeping PERA’s promises” without actually keeping them, something that the Independence Institute has been warning about for years.
Advertised as a recruiting tool, PERA is increasingly becoming a trap.
The alternative – putting the burden on communities – is no better. Squeezing out classroom or road spending, or raising taxes on people trying to save for their own retirements is just as wrong.
All of this to prop up a traditional guaranteed annual pension model that the private sector almost completely abandoned a generation ago.
After 17 years of declining finances, we must admit the truth – PERA’s DB structure doesn’t provide secure retirement. It makes promises to retirees it can’t keep. It weakens communities by forcing them to compete for scarce resources. It puts future retirees’ financial security in the hands of politicians who are under pressure to meet current demands.
Change is coming. The citizens of Colorado can choose to be its architects rather than its victims.
We can change from this DB plan and give new and unvested members a defined contribution (DC) plan, and offer existing members the opportunity to switch their participation into it. DC plans operate like the 401(k)s that most of us are familiar with, with individual accounts and known balances.
Instead of being offered uncertain promises, retirees will know exactly where they stand at all times. Communities will have predictable contributions. Future hires will no longer contribute more than they can expect to get out in order to cover for the promises of long-gone politicians.
Members will be in charge of their own futures.
DC plan opponents often accuse proponents of wanting to hand over members’ accounts to fee-hungry Wall Street firms. But there is no reason why PERA can’t be the default manager for members’ DC money. Continued success will be rewarded with continued member loyalty.
Converting new and unvested member to a DC plan won’t eliminate PERA’s unfunded promises. Those members will continue to accrue new benefits, and the existing unfunded liability will need to be amortized over the lifetimes of those members. Employers will still have to contribute on a per-employee basis to fund the legacy plan, and members under that plan will still likely see their contributions rise.
But such a new plan will stop the problem from getting worse. States as geographically and demographically diverse as Florida, Michigan, Pennsylvania, and Utah have all adopted some version of this change. Colorado can be even bolder.
We didn’t get here overnight. PERA’s average return since 2000 has been 5.4%, even as its projected return has slowly dropped from 8.75% to today’s still-optimistic 7.25%. Legislators in the late 90s chose to increase benefits. In the early 2000s, the Board sold Service Credit at fire-sale prices. And the state legislature, while paying every legally-mandated dollar, failed to compensate for several years of poor returns.
In 2004, 2006, and 2010, PERA proposed and the legislature cut benefits and increased contributions. Each time, the PERA Board hailed PERA’s return to long-term stability. Each time, they have been forced into additional fixes.
Rather than endless knob-turning and dial-twisting that does little more than tighten screws, let’s retire this broken model and replace it with something that works both for Colorado’s taxpayers and its public servants.
Joshua Sharf manages the PERA Project at the Independence Institute, a free market think tank in Denver.