PERS Solution #6: Limit the growth of liabilities in the future
Currently, if investments underperform and contribution rates are increased to make up the difference, employers bear the full cost of the rate increases. In the future, employees should share in the increased contributions needed to make up the difference.
Another problem arises when salary growth outpaces the rate assumed by the system’s actuaries. Higher salaries mean higher pension payouts, generating more liabilities for the system. Currently, PERS payroll rates are based on the assumption that salaries will increase an average of 3.5% a year for each employee. But the state economist foresees private sector wages growing at 4% a year for the next five years. If public sector salaries keep pace, employers will have to pay more to account for higher pension payouts in the future.
Most public employers are unaware of the effects of higher salaries on their pension obligations. To give this issue the attention it deserves, PERS administrators should provide information to each PERS-covered employer on:
- the effects of exceeding the pension plan’s assumed rate of salary inflation on the unfunded liabilities of the system; and, Save
- the effects of any resultant increase in liabilities on the future payroll rates to be applied to the employer.
Whatever the causes of any increase in liabilities and payroll rates, the Public Employees Retirement Board could be given the authority to refashion contribution rates for active members based on a consideration of salary level, so that higher paid employees are required to pay a higher portion of salary for their benefits. For example, active members earning more than $100,000 per year would be required to pay a higher contribution rate than those earning less than $100,000 per year in the event that contribution rate increases are required.