Clarifying PERS Benefits

By Don MacGillivray

The Public Employee Retirement System(PERS) began in 1946 and includes many types of public service employees. The employee breakdown is: public school – forty-three percent, state government – twenty-nine percent, and municipal government – twenty-eight percent.

The PERS system was once easy to explain. Benefits equaled the employee contributions plus investment earnings. Three quarters of the money came from investment earnings managed by the Oregon Investment Council and the Oregon Treasury. Over the years this has been very successful.

A mandatory employee retirement contribution of six percent went into a separate retirement account, but since 2004, it’s no longer used to support the pension fund. Now the six percent of PERS covered salaries go into money market accounts similar to 401(k)s, but retirees still receive their PERS defined pension benefit.

Since there is never enough money, the shortfall is paid by the state, schools, and municipalities. Recently the debt is $22 billion and it’s increasing. The more than nine hundred public employers are required to pay $1.1 billion more to fund the system in the current biennium.

Many of the problems with PERS were initiated in the years between 1980 and 1990 when the governing board was dominated by public employee interests that modified contractual formulas in their favor. Lawmakers never intended that the benefits should be so generous.

This occurred because of a period of high stock market returns. Because the rate of return was calculated on what was happening in the 1990s market it was set at 7.2 percent. When the market went down, the fund fell into deficit and it has never been appropriately changed in spite of several major attempts to do so.

At the end of 2017 there were 145,863 PERS retirees. They were divided into three Tiers.

Tier 1 employees were hired before 1996 and they were able to retire at the age of fifty-eight after thirty years of service with the most generous benefit package. They now include eighty-eight percent of the total number of PERS retirees.

Tier 2 employees were hired between 1996 and 2003 and they need to wait until age sixty to retire with somewhat reduced benefits. They include nine percent of the total number of employees.

Tier 3 was created in 2003 when the PERS system was in crisis. It was changed so employees must wait until age sixty-five to retire and a supplemental contribution plan was created in such a way that they no longer paid into the system. They are the remaining three percent of the employees hired within the last sixteen years. Oregon is now the only state pension system in the country that requires no contribution from employees.

There is much discussion about the average annual pension payment going to PERS recipients. Everyone always seems to be concerned that the deficit is too big because too many people are getting too much money. Only about one percent of PERS retirees, or about 2,000 former public employees, receive over $100,000 a year. The initial average is about $36,000 a year.

In 1990 they received less than half of this amount. The median age among retirees was sixty-two and their average years of service was twenty-six. Nearly 70,000 employees, nearly half of the total retirees, receive less than $24,000 a year and about another quarter receive less than $12,000 a year.

Since 2003, public employees also pay into and receive Social Security. There is a great deal of variation due to the specific situations of each retiree so generalizations often are not useful. The highest paid person receives $913,000 a year, but this is only fifty-eight percent of a $1.6 million salary received in their last year of employment at Oregon Health Sciences University.

The body in charge of PERS, along with many political and governmental entities, have been trying for over two decades to improve the retirement system. Some improvements adopted were challenged and eventually overturned by the Oregon Supreme Court leaving the status quo unchanged. There have been other successful changes, but none that were significant enough to solve the problems.

The Oregon Business Council has a number of suggested pension changes for lawmakers in Salem to review this session, but the possibilities for reform are limited.

Much of the talk is around the $2 billion tax increase as a temporary solution to the PERS and school budget issues. The three suggestions made at the Oregon Leadership Summit were: 1) employee cost-sharing, 2) have employees choose between a pension plan or an expanded defined contribution plan, but not both, or 3) a working retirement payback plan.

The unfunded liability will grow by about $4 billion to a total of $26 billion. There soon will be another $2 billion in increases in the statewide pension costs and other rate increases within the next two years. The real solution may be a ballot measure sent to the voters in the near future, but this has yet to be determined.

Given the fact that demands on the financial situation is projected to get consistently worse over the next twenty years, some stakeholders are concerned about the possibility of bankruptcy. This is not expected because it is the state and local governments that are required to fund PERS and they would need to declare bankruptcy.

This has happened in other places such as in Stockton, California and in Detroit, Michigan, but Oregon statutes do not allow the state or a municipality to declare bankruptcy.

Another factor in these considerations is how current employees will react to any change that might reduce benefits. With one third of the current public employees in the PERS system able to retire at any time, a significantly unfavorable change could cause a spike in retirements and make it difficult to replace experienced employees with new ones.

While the financial burden of the PERS fund has been changed and reduced over time, it is important that everyone is pleased.

Clarifying PERS Benefits

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