PERS Solution #2 – Correct the excesses of the system’s older and richer pension plans.
Employees hired before 2003 were promised a pension of 50% of final salary after a career of 30 years, in addition to what they receive from 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, these retirees are receiving more in retirement than they earned while working. Today, one of every three active public employees are in this ;re-2003 benefit 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 plan.
The “Everybody in One Affordable Plan” Approach
Moving all employees to the post-2003 benefit plan is one possibility. This would require that all employees hired before 1996 (Tier 1) and those hired between January 1, 1997 and August 29, 2003 (Tier 2) step down to the same level of benefits now being earned by employees hired since that date (Tier 3 or OPSRP). This would be done prospectively for benefits yet to be earned on a going forward basis. But the savings would be considerable, as the ongoing costs of Tier 1 and 2 (net of prior liabilities) are almost twice those of OPSRP.
Only a third of current workers remain in Tier 1 and 2, but they represent more than 40% of current payrolls. So the savings from this change would be significant, even as those savings decline over time as more and more of these employees retire.
Making OPSRP the standard for all future pension accruals would still provide a competitive retirement benefit with other state systems. Here’s one example:
The “Targeted Correction of Excesses” Approach
Another approach would be to target the features in the Tier 1 and Tier 2 plans that have produced the outsized pension benefits well above.
- The guarantee of a minimum earnings rates on Tier 1 employee accounts (now 7.2%), which inflated those accounts over time and cost the system $256 million in 2018 alone;
- The use of a formula for converting Money Match (video) accounts into lifetime pension incomes (“annuitization”) that double counts inflation;
- The use of unused sick leave and vacation benefits to inflate the “final average salary” base for computing pensions; and,
- The absence of a salary cap for Tier 1 pensions, which has been responsible for generating pension payouts as high as $900,000 a year.
PERS Solution #2 and the 2019 Legislature
Senate Bill 531, sponsored by Sen. Tim Knopp, contains provisions that would correct the excesses of the PERS pension plan by moving to a highest-five-years-salary basis for computing pension benefits and capping pensionable salaries at $100,000 a year.