The Colorado Public Employees’ Retirement Association has been under fire for most of this decade. Critics of the retirement program claim that it’s fiscally unsustainable. They point to its precarious funded status, overgenerous retiree benefits, faulty mortality assumptions, optimistic investment return projections and burdensome employee/employer contributions.
PERA CEO Greg Smith disagrees. Kicking off a listening tour that stopped in Colorado Springs earlier this month, Smith was guardedly optimistic.
“PERA provides a sustainable and secure retirement program that attracts the best and brightest to public employment while strengthening the Colorado economy,” Smith said. “Although PERA remains stable and solvent, changing economic and demographic conditions have extended the period until PERA reaches fully funded status, increasing the risk facing members, taxpayers and Colorado. Given the significance of PERA to Colorado, it is critical that we work together to ensure its strength and longevity.”
Following the listening tour and the June 30 release of the 2016 comprehensive financial report, PERA is expected to craft a reform package for consideration during next year’s legislative session
For Colorado public employees, PERA acts as a substitute for Social Security. Employers, including state and local governments, public schools and other public entities, pay into PERA along with employees.
“We’re not on the brink of running out of money,” Smith told the board in January. “But what we are is at a much higher risk profile than we’re comfortable with.”
PERA’s average monthly benefit paid out to 110,000 retired public employees was $3,203 at the end of 2015. Specifically, 31,785 retirees receive $50,000-$100,000; 1,276 get $100,000-$150,000; 74 get $150,000-$200,000; and 18 get $200,000 or more. Pensions are based on years of service and salary level at retirement.
Employees in the school division contribute 8 percent of their salary to PERA. Employers (e.g., Colorado Springs School District 11) pay a contribution rate of 10.15 percent as well as two “amortization equalization disbursements” of 4 and 4.25 percent. Total contribution as a percentage of covered payroll: 26.35 percent.
By contrast, Social Security’s contribution rate is 6.2 percent for both employer and employee, for a total of 12.4 percent. The average benefit is $1,341 and the highest benefit paid to a worker retiring at full retirement age is $2,687.
It’s easy to blunder into an incomprehensible thicket of numbers, but PERA’s problems are simple and intractable.
• Retiree numbers are growing as people are living longer and Baby Boomers exit the workforce.
• That beneficiary bulge has to be funded both by returns on PERA’s investment portfolio and contributions by current employers/employees.
• Public employers are restive (to put mildly) over the extraordinary cost of funding the pension program.
• Despite high contribution rates, there’s not enough money in the investment portfolio.
So what should PERA and the legislature do to solve the problem? There’s one easy solution: a prolonged economic boom that would bring annual returns up to 11 or 12 percent for the next decade. That’s unlikely, and it’s even something of a reach to assume (as PERA’s actuaries do) that the investment portfolio will grow at a compounded annual rate of 7.25 percent.
The most recent annual report put PERA’s funded ratio at 60.4 percent as of the end of 2015. The funded ratio according to PERA “represents the plan assets as a percentage of the plan liabilities, or in other words, the measurement compares the assets available to pay benefits to the benefits that must be paid. To the extent promised benefits outweigh the current assets, there exists an unfunded liability.”
The 2016 report will be released on June 30. It’s doubtful that the ratio will have improved. PERA skeptics believe the plan is already close to insolvency, propped up only by unrealistic return assumptions.
There will be some sort of fix put in place during next year’s legislative session, but PERA’s travails mirror the American dilemma. People are living longer, getting poorer, and many don’t support lavish public worker pensions. Just as alienated voters in the Midwest put Donald Trump in the White House, tomorrow’s populist poor may demand an end to taxpayer-supported pensions for an elite few.
Taxes, retirement and health equity has long been at the center of American political discourse, but only aspirationally. As the geezer wave crests, demographics may bring sudden change to the debate.
If you’re getting PERA, good on you! And if not, too bad — guess you chose the wrong career.