Why are contribution rates to PERS increasing?
Public employers – schools, parks systems, cities, etc. – pay a percentage of their total payroll to cover costs related to retirement benefits on two levels: First, to save for future benefits for workers who are currently on the job, and second, to fund past obligations to workers who have retired. For current employees, contribution rates are falling as workers with more expensive benefit contracts (Tier 1 and Tier 2) reach retirement age and workers with less expensive benefit agreements (Tier 3, also known as OPSRP) make up a greater share of the workforce.
But the expense for retired workers is scheduled to increase over the next 18 years. This is based on state policies for how to fund significant past obligations. These past obligations are associated with older benefit systems that are no longer offered to new employees. These older benefit systems made promises to employees based on a combination of factors, but the biggest contributor was optimistic estimates for stock market returns that fell far short of reality. The economic crash associated with the Great Recession created an estimated $14B gap between what public employers should have saved for retirees and what they had in their accounts. Poor investment returns in subsequent years and updates to mortality estimates also significantly contributed to the PERS underfunded status.
Oregon governments are required to pay for retirement promises, even if their plan to save and invest funds for that purpose did not pan out. As a result, the state is now requiring governments at all levels to invest more in the fund over the next 18 years to make up for the lost earnings of the last twenty years. That payment plan increases the rates that local governments must pay for PERS – even while the costs for current employees are less than they have been in decades.
How large is the average monthly pension benefit that retired public employees receive?
News reports have focused on super-sized benefits; however, the median monthly pension benefit is $2,058, meaning that half of PERS retirees receive a benefit of $2,058 or less per month, while the other half receive a benefit of $2,058 or more. Fewer than 1% of retirees receive more than $9,000 per month. (PERS By the Numbers, 2018 https://olis.leg.state.or.us/liz/2019R1/Downloads/CommitteeMeetingDocument/159607, page 6).
Do PERS benefits allow retirees to be financially self sufficient in retirement?
To meet basic needs, retirees in Oregon need an income of between $1,510 and $2,853 per month, depending on where they live throughout the state and whether or not they own a home without a mortgage. The median PERS benefit falls within this range, implying that some retirees will earn enough through PERS to maintain economic security after they retire, while others will not. (http://www.basiceconomicsecurity.org/EI/location.aspx)
Will cutting retirement benefits for current employees solve the problem?
No. Current proposals to reduce benefits could alleviate about 5 percentage points of payroll from the 20 percentage point increase that many public employers face over the next couple of decades. At a maximum, cuts to current benefits could solve a quarter of the problem. But it is unclear what other problems those cuts might create for public employees (income and retirement security) and employers (competition in the job market and the need to increase compensation to make up for reduced benefits).
How can employer contribution rates be lowered? Is it possible to stabilize PERS contribution rates without cutting retirement benefits? Increasing the timeline for fully funding the PERS liability and funding the liability (directly or indirectly) with new revenue are policy options that can reduce PERS employer contributions at the scale of the problem. Extending the timeline does not diminish the total cost – and without dedicated new funding would actually represent a significant new public expense. However, the right combination of new funding and an extended timeline could result in significantly stabilizing local budgets.
What are the differences between Tier 1, Tier 2, and OPSRP?
Public employees hired prior to 1996 were eligible for the Tier 1 benefit plan. Public employees hired between 1996 and 2003 received the Tier 2 benefit plan, and employees hired after 2003 were enrolled in the OPSRP (Tier 3) plan.
The eligible retirement age is later for those covered by OPSRP than for employees covered by the Tier 1 and Tier 2. In addition, the annual benefits received under OPSRP are a smaller portion of final average salary. An employee who works for 30 years and whose final average salary is $65,000 will receive $29,250 per year in OPSRP retirement benefits, but would have been eligible for at least $32,565 per year under Tier 1 and Tier 2 retirement plans. In many cases, employees covered by Tier 1 or Tier 2 received significantly more due to the money match option. For example, individuals who retired at the turn of the century, continued to receive nearly the same amount in retirement benefits as they had in salary. This is not possible under the OPSRP system.
For more details on the differences between benefit systems, see: https://www.oregon.gov/pers/Documents/General-Information/PERS-by-the-Numbers.pdf, pages 5 - 14
If we tackle the problem of the PERS unfunded liability, will we be able to maintain current service levels in the future? What are other cost drivers, besides PERS, that impact public budgets?
While the costs associated with the PERS unfunded liability represent the largest obstacle to public service provision over the next couple of decades, other significant barriers to Oregon’s ability to maintain current services include addressing restrictions on property tax growth, the rising costs of health care and health insurance for public workers, and the costs of deferred maintenance for roads, parks, streets and bridges. If property tax growth lags behind inflation in the coming years, local governments could experience significant budget struggles. Health care costs are increasing at a slower rate than PERS costs, but make up a larger portion of public budgets than PERS expenditures do. If those costs are not curbed in the coming decades, they could quickly escalate to unmanageable amounts.
Why does Oregon PERS currently offer both defined contribution and defined benefit plans? Oregon’s hybrid retirement system allows for shared investment risk between employees and employers. Each employee has an individual retirement savings account while simultaneously enrolled in a moderate defined benefit plan. The strengths these systems operating in tandem serve as a counterweight to their individual weaknesses.
What are the pros and cons of defined contribution, 401-K style plans? Defined contribution plans specify an amount to be contributed each year towards an employees’ retirement savings. Because no benefit guarantees are made in these types of plans, employees bear the full risk of low-investment returns. Employees retiring at different times are likely to experience significantly different levels of retirement security. The lack of commitment about the ultimate size of the retirement investment may prevent an unfunded liability, but could lead to greater dependency on government assistance for those who retire during economic downturns. Some argue that defined contribution plans may benefit young employees who only spend a few years in public service more than defined benefit plans do, claiming that benefit entitlements are comparatively small in the early years of an employee’s career.
What are the pros and cons of defined benefit plans? Defined benefit plans specify a benefit amount to be received in retirement, placing the risk of low-investment returns on the employers rather than employees. The nature of defined benefit plans requires complicated forecasts about the future that are inherently uncertain, opening the possibility for unfunded liabilities that place pressure on government budgets. However, defined benefit plans can take advantage of long term investment strategies that defined contribution plans may not have access to, and are often seen as more favorable to middle aged employees and career public servants such as teachers, firefighters, and police. Defined benefit systems offer retirement security that is not as sensitive to market cycles.
Does every government pay the same amount? No. Public employers pay different amounts based on a number of factors — their past and current employment, wages, and negotiated contracts. This sortable database provides data from 2015-16: https://s3-us-west-2.amazonaws.com/econw-projects/combine_costs.html