PERS Solution #5: Let employers continue to pay the 6% employee contribution in lieu of salary.

Almost two-thirds of public employees in Oregon have their 6% contributions to the retirement savings plan picked up by their employers.

When first instituted decades ago, the 6% pickup was a way to shelter 6% of an employee’s pay from payroll and income taxes. At that time, the 6% still went to support the pension plan, so there was no effect on an employee’s retirement benefit.

But after 2003, when the 6% employee contribution was shifted to a separate retirement savings plan, the 6% became a source of funding for additional retirement benefits. And the employer pickup of the 6% became more controversial.

However, the 6% employee contribution is not a cost driver. It’s a fixed percentage of salary, unlike the rising payroll rates for the pension plan. When the 6% is paid in lieu of salary, it reduces payroll costs for both employers and employees. (That’s why, in some systems, the employer pickup is known as “salary sacrifice.”) So who pays the 6% is not the problem so much as where it goes.

Proposals to rebalance the PERS benefit structure (See Solution #3) treat the existing 6% employee contribution as part of the solution. Redirecting that 6% from a separate retirement savings plan to the pension plan is a relatively painless way to reinstate employee contributions to support their pensions. There will be no effect on employee paychecks and employers will realize the same savings if the pickup in lieu of salary remains in effect.

However, there is one issue with the pickup that deserves more attention. By tax sheltering 6% of employees’ pay from state income taxes, the state foregoes a sizable amount of revenue – about $30 million a year. This is close to what public employers save in Social Security payroll taxes on the exempted 6%. So most of the savings from the pickup accrues to employees, while employer savings across all public jurisdictions are offset by a loss of revenue for the state.

PERS Solution #5 and the 2019 Legislature

Senate Bill 148, sponsored by Sen. Tim Knopp, explicitly allows for continuation of the employer pickup as part of a rebalancing of the PERS benefit system.

< previous solutionnext solution >