UNDERSTANDING THE BATTLE OVER REFORMING PERA
Understanding the battle to reform Colorado’s public pension
The tragic death on Tuesday of Greg Smith, executive director of the Colorado Public Employees’ Retirement Association, leaves a huge gap in leadership at a critical time for the financially troubled system. Smith spent much of the past year explaining the pressing need for reform to anxious public workers and retirees. But now someone else will have to pick up that banner, since finding a financial fix for the tottering system remains what should be the highest priority in the upcoming legislative session.
As the fog of competing claims about PERA spreads in the next few weeks, here are a few tips on how to cut through the rhetoric.
• Beware of attractive slogans. “Shared sacrifice” sounds appealing in the abstract, but it’s a flawed idea when one of the pillars financing the Colorado Public Employees’ Retirement Association, or PERA, is groaning under the existing burden. Taxpayers already contribute a staggering amount to fund PERA. Indeed, their contribution will rise to more than 20 percent of payroll in January as the final installment of the last set of pension reforms kicks in, diverting revenue from actual programs and services.
PERA’S board is proposing the legislature boost contributions from public employers such as state government and school districts by an additional 2 percentage points, to 22.15 percent of payroll. Most current employees would also contribute more: 11 percent of salary instead of 8 percent, while new employees would contribute 10 percent but get reduced benefits when they retire.
The board’s proposal is serious and thoughtful, but Gov. John Hickenlooper has a better idea. Given how much PERA is eating into government budgets, he would freeze the public employer contribution and throttle back the hike in the employee contribution to 2 percentage points. Then, however, he’d cap the annual increase in PERA benefits to 1.25 percent until the pension fund is financially sound. That’s only a quarter percentage point below a cap the
board is also proposing, but the savings are substantial.
State Treasurer Walker Stapleton, a Republican and longtime PERA critic running for governor, is pushing an even bolder plan. He’d freeze benefits outright until PERA is out of the financial woods. That’s not as radical as PERA advocates claim, and hardly unheard of, either. For example, Denver’s independent municipal retirement system has skipped cost-of-living increases a number of times — and offers a compelling explanation on its website — even though it is in better shape than PERA. When you’re in a deep hole, you generally stop digging. However, Stapleton’s plan has little shot of gaining traction in the politically divided legislature. Better to concentrate on the Democratic governor’s plan.
• Don’t let the perfect become the enemy of the good. Here we return to Stapleton. He opposes the other reform plans for fear they will fall short of what’s needed, just as the 2010 reforms proved too weak. His primary argument is that PERA’S assumed rate of return on investment, at 7.25 percent, remains too high despite having been lowered a year ago. Well, he’s right: The return assumptions remain optimistic, particularly with market indexes at all-time highs. And yet that hardly undermines the case for leveraging a growing consensus that PERA’S $32 billion (and ballooning) financial hole is intolerable to enact a series of long-needed reforms, including a hike in the full retirement age to a more reasonable 65.
Besides, both the PERA board and governor want to add automatic adjustments to contributions if the fund underperforms so corrective action will occur without intervention.
• Ignore calls for transforming PERA into a 401(k)-type system, which are likely to come from some Republicans. The transition costs would be staggering and political resistance implacable.
• Don’t confuse the average pension benefit with career pension benefit. The distinction is critical to a fair understanding of retirees’ financial situation.
PERA’S annual report notes that the average monthly benefit for retirees was $3,161, or $37,932 a year. The average pension in 2016 for a retired school teacher was $37,000, for example, and for a retired state worker it was slightly over $40,000.
Now dig deeper and here’s what you find: The average years of service for both retired teachers and state workers was roughly 23, which is less than a normal full career. Many of them probably worked elsewhere at some point and presumably qualify for other benefits. They also retired earlier on average than workers in most industries.
A full working career in this country is at least 30 and often 40 years. And for PERA retirees who worked 30 or more years, the data tell a very different story. For state division retirees in 2016 with 30-plus years of service, the average annual benefit was $67,116; for school division retirees, it was $56,340.
There is nothing scandalous about those figures, but there is no denying they are generous so far as pensions go. The maximum benefit for Social Security in 2017 (meaning for someone who had the maximum taxable earnings and waited until age 66) was about $33,000. (It’s only fair to point out that workers contribute 6.2 percent of wages to Social Security, which is less than the deduction from PERA member salaries, although not drastically so.)
PERA advocates often suggest that private-sector retirees routinely tap into other pensions to supplement income, but that’s not true for most. As the Pew Charitable Trusts explained in a report this year, “Less than half of nongovernment workers in the United States participated in an employer-sponsored retirement plan” of any type, and only about 10 percent had a traditional defined-benefit pension like PERA. Not only has the percentage in defined-benefit pensions plummeted since the 1980s, it continues to shrink.
Indeed, the U.S. Government Accountability Office in 2015 found that “about half of households age 55 and older have no retirement savings such as in a 401(k) plan or an IRA.” That’s one reason why Democratic lawmakers in Colorado have twice sponsored legislation to create a state-sponsored retirement savings account for people whose employers fail to offer them.
As for the minority of workers who participate in a 401(k), their eventual nest egg will be generated predominately from their own savings — or even exclusively if their employer doesn’t offer some matching incentive.
To be clear: It’s great that PERA retirees receive good pensions. People shouldn’t have to retire anxious about whether they can make ends meet. But pensions must be paid for. And the good news is that PERA can be tugged back from the financial precipice without consigning its retirees to porridge and second-hand clothes. They’ll still get good pensions after necessary reform — but in a system secure from economic turbulence.