The Public Employee Retirement System (PERS) is scheduled to claim an additional $10 billion from public service budgets over the next eight years. That money will have to be squeezed from services or billed to Oregon taxpayers. What can be done to limit the damage from these increases? Here are seven sensible solutions:
Almost all public employee retirement plans in the U.S. require employees to share in the cost of financing their pensions. But Oregon ended this requirement in 2003, when the legislature shifted employee contributions of six percent of pay from the pension plan to a supplemental retirement savings plan. As a result, the full cost of the pension plan was shifted to public jurisdictions and their taxpayers. Time to shift it back. Redirecting the employee contributions to support the pension plan can cut by a third to a half the cost increases that will otherwise fall to taxpayers. And doing so won’t cut any employee’s paycheck.
There are different ways to structure employee cost sharing:
One approach is to reinstate the 6% contribution for all employees. This approach in contained in Initiative Petition 19, proposed for the 2020 election. Savings from this approach will offset approximately half of the cost increases that will otherwise be borne by public jurisdictions and their taxpayers.
Another approach would align employee contributions according with employee benefit levels. Employees in the higher-cost Tier 1 and Tier 2 benefit would pay 6%, while those in the less-costly OPSRP program (those hired since 2003) would pay 3%. This is roughly how Initiative Petition 20 would work, by keying employee contributions to the going-forward cost of pension benefits. This approach would offset approximately one-third of the pension program’s projected cost increases.
A third approach, proposed by Governor Kate Brown, mirrors the approach of Initiative Petition 20, but would establish smaller employee contributions rates and apply these rates only to salaries above $20,000 per year. The Governor’s proposal would offset about 13% of the pension program’s projected cost increases.
Why is PERS requiring all public employers to provide both a pension plan and a 401(k)-style retirement savings plan – especially when the pension plan is chronically underfunded and exorbitantly expensive? Why not beef up the 401(k)-style retirement savings plan as a replacement for the pension plan, as Lincoln County has done? Or let employees choose which plan suits them better, as unions and management agreed to do at the Oregon Health and Sciences University? Either way, there will be savings for public jurisdictions and their taxpayers. And employees who work less than five years in the public sector will do far better with the retirement savings plan that they would with the pension plan.
Employees hired before 2003 were promised a pension of 50% of final salary after a career of 30 years, in addition to Social Security. But their pension payouts have far exceeded that target, averaging 78% of final salary over the last three decades. With Social Security on top and a separate retirement savings plan on top, these retirees are receiving more in retirement than they earned while working. Today, one of every three active public employees is in this category, earning benefits at far higher rates than their colleagues. It’s not their fault. Mistakes were made. But it’s time to correct these mistakes. What employees have earned to date must be protected. But we can align their pension benefits with those of their younger colleagues by moving them to the post-2003 pension plan for future benefits or by modifying the most costly features of the older pension system.
The latter approach could save close to one percent of payroll if limited to reforming the excesses of the Money Match option, which has generated pension payouts above the basic pension formula for almost half of all retirees over the past 30 years.
Another reform would apply the current cap on pensionable salaries (now $280,000 per year for Tier 2 and OPSRP) to Tier 1 employees. This would affect only a small number of active employees, but it would respond to the embarrassing headlines of Tier 1 pensions exceeding $500,000 a year for some PERS retirees.
Retirees who are re-employed for short stints and those old enough to retire could keep working and draw retirement benefits, provided they devote 6% of their pay to cover the costs of their already earned, but underfunded, pension benefits. Employees will come out ahead when they add up what they’ll earn in salary and pension benefits over the years. Employers will no longer have to pay for the continued accrual of benefits by those who decide to retire early. And both employees and employers can devote their payments to buying down the system’s liabilities.
Based on the number of retirees “working back” currently, these payments would reduce the unfunded liability of the PERS pension program by $65 million a year. And that number would increase if more employees choose to retire early to take advantage of this arrangement. Plus, schools, which expect to be challenged by the need to staff up for the new services proposed by the Student Success Committee, would be able to keep experienced employees where needed.
Okay, this is not a change. But it’s time to dispel the confusion about what’s known as the “employer pickup” and take this issue off the table. Before 2003, almost all public jurisdictions picked up the employee’s 6% contribution to the pension plans. Since then, most employers shifted the pickup to cover the 6% employee contribution to the retirement savings plan. But the pickup is not a problem when it’s paid in lieu of salary. The problem isn’t who pays the pickup, but where it goes. Besides, it’s a fixed 6%. It’s not rising every year like the costs of the pension plan.
Keeping the pickup as is will ensure that the employee contributions proposed in Solution #1 need not force any reduction in employee salaries or take-home pay.
Even with reforms to the contribution and benefit structures of the current PERS plans, public jurisdictions will still confront a multi-billion-dollar liability for past mistakes and prior underfunding. This liability will grow or shrink based on the system’s earnings on its investments and the rate of salary growth on which benefits are payable. If investments underperform, employees should share in the increased contributions needed to make up the difference. And employers should be responsible for managing payrolls so as not to increase the system’s liabilities for higher-than-expected payouts.
Once reforms are enacted and measures are in place so that we’re not continuing to chase a rising target of unfunded liabilities, we can treat the PERS liability as a one-time debt obligation. This will open up new possibilities to extend its repayment period, make use of the state’s bonding capacity to ease the burden on schools and local governments and/or identify new funding sources to pay off the obligation. Taking this burden off public payrolls will relieve today’s and tomorrow’s students in our schools and the next generation of Oregonians from bearing the full weight of budget cuts and curtailed services that will otherwise result from an unbalanced, uncontrolled and unaffordable retirement system.
If we do nothing to address the impact of PERS, we will see increased claims on budgets and reductions in services even if the economy continues to do well.