Kennedy: What lies ahead for PERA
The economic downturn has drawn much attention to the long-term liabilities of public pension funds and how to pay for them. In 2000, more than half of the states including Colorado had fully funded public pension plans. By 2008, the number with fully funded plans had shrunk to only four.
Responding to this unprecedented drop, some states, including Colorado, took steps to shore up the solvency of their pension funds. Last year the Colorado legislature raised the retirement age, increased the required contributions for employees and employers in PERA and reduced the cost-of-living increases for current and future retirees. Today Colorado PERA is 69 percent funded and, under the new law, its funding level will improve steadily over time, reaching fully funded status in 30 years.
But even with these changes, some argue that Colorado simply cannot afford to keep a defined-benefit pension system. By 2018, the State of Colorado and every school district will pay more than 20 percent of its payroll into PERA. While some of this will come from foregone wage increases, it will put extraordinary pressure on cash-strapped governments, especially school districts that are already under-funded. These long-term pension obligations could also hinder districts’ ability to fund education reforms which call for rewarding great teachers earlier in their careers.
On the other side of this dialogue are public employees, including teachers, who over time have consistently earned less and saved more than their private-sector counterparts to pay for their retirement security. PERA members put aside 8 percent of their salary every year, far more than the average private-sector worker. Most do not contribute to Social Security, so the PERA benefit is their primary income in retirement. Today over 80 percent of PERA benefits come from member contributions and investment earnings – not taxpayers.
Research comparing public and private compensation levels that takes into account educational attainment shows public workers earn 11 percent less on average than their private-sector counterparts. Long-term retirement security for Colorado public employees is necessary to attract and retain talent and make up for years of lower pay.
It is also important to consider that PERA plays a huge role in Colorado’s economy. PERA pays $2.5 billion annually to over 70,000 retirees living in Colorado. In many areas of Colorado, PERA benefits account for more than 10 percent of the earned income in that community. Every hairdresser, coffee shop and auto dealer in Colorado has customers spending PERA benefits. This steady stream of retirement income spent in every county and on every Main Street in Colorado becomes even more important when the economy is in recession.
In the end, the debate over PERA and the defined benefit pension system will likely be less about politics and more about economics. Today, nearly 60 percent of PERA’s investment portfolio is in global equities of which nearly 30 percent is invested outside of the United States. If the world economy dampens, the state and local governments in Colorado will simply not be able to pay more to make up for further market losses. However, if the global economy grows as it has over the past 25, 50 and 100 years, PERA’s investment earnings will provide economic stability for hundreds of thousands of future Colorado retirees and serve as an important economic stabilizer without busting the bank of the state and local governments.
Let’s hope for the latter.
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