The strategy is to structure benefits consistent with a policy that encourages workers to stay on the job until age 62
“All the cards are on the table face up.”
So went the pronouncement of Gov. Haley Barbour last week in detailing a 40-page report that calls for saving over $100 million annually in taxpayer contributions to the Public Employees Retirement System of Mississippi. Much of the savings would come through increases in retirement ages, changes in the way retirement benefits are calculated and freezing of cost of living allowances for retirees.
A 12-member study panel Barbour appointed in August prepared the report, which will now go to the Legislature for review and possible action. Expect a donnybrook, judging by the stakes for both proponents of the changes and the 86,000 retirees and 246,000 public service employers covered in the system.
“There’s going to be a lot of people who aren’t happy campers,” said one official of a state employee union.
It’s not time to go under the hood and try to fix something that is not broken, said a longtime Democratic state representative.
But broken it is, say Barbour and various other officials who insist the $20 billion PERS trust fund is running short by over $12 billion and won’t be sustainable without either the proposed changes or more frequent injections of taxpayer cash.
“Employees and retirees ought to be beating on the doors of the legislators saying we cannot accept this — not a system that is in this bad of shape,” Barbour said.
If enacted, the changes would keep 30-year workers on the job to age 62 to gain full retirement benefits. They could retire at 55, provided they had worked 30 years . On the downside, they would have to go without cost-of-living increases, or COLAs, until they reach 62.
Retirement before 55 would still be possible for workers with 30 years of service, though eligibility would be limited to “an actuarially reduced benefit.”
The idea, the report says, is to structure benefits consistent with a policy that encourages workers to stay on the job until age 62.
The retirement age changes and the tiers they entail would apply to current and future employees, the governor’s office said.
>> Another hotpoint: Cost-of-living allowances, or COLAs, and the compounding the 3 percent COLAs undergo for retirees after 55.
COLAs and their compounding account for more than 25 percent of the PERS plan’s payout each year — and $402 million of the plan‘s $500 million annual unfunded portion, according to the study commission. Thus, the panel wants a three-year freeze on them and elimination of the 3 percent payout in favor of a COLA based on the Consumer Price Index, with a 3-percent cap.
Tying the COLA to the inflation index would save an estimated $10 million a year, the panel says.
Retirees could still take the COLA payment as a lump-sum as a so-called “13th check.”
The report suggests allowing retirees to collect their yearly COLAs but receive no increase in the COLA payment over a three-year period. For workers not yet retired, no COLA could be received for three years after retirement.
The panel further suggests lawmakers may want to look at calculating the benefit amount based on the worker’s base pay over four consecutive years of service. “The Legislature should study whether it is appropriate to include unused leave, overtime pay, special pay, and per diem and travel (in the case of legislators) as part of an individual’s final average compensation,” the report says.
The report recognizes “retirees have performed service and earned annual accruals” and the accruals are likely protected under contract law. But not the 3 percent COLA, the report says.
Instead, it is likely the COLA can be deemed “a future accrual and not a benefit earned for prior service,” the report says. “Thus, it may be permissible to make a change in future accruals of the 3 percent cost-of-living adjustment.”
Speculation arose in the days leading to the report’s release that the revamp would entail switching some or all of the current “defined benefits” plan to a 401 (K) style “defined contribution” plan. That did not happen, though study panelists said the PERS board should consider some optional defined contribution arrangement to entice younger people into public service by offering a 401 (K) type plan with portability.
So what is the immediate upside to implementing the suggested changes?
Barbour said changing future accruals of current members and retirees as well as all new hires would result in lowered contributions of 2.12 percent for plan participants and would increase the ratio of PERS assets-to-obligations to 67 percent from the current 62 percent.
Most important to Barbour’s goal of reducing the cost to taxpayers is a projection that the changes would lower the employer contribution by $122.2 million in the first year alone.
Workers contribute 9 percent of their pay to the plan and the state and other public employers 12 percent, a figure that will rise to 12.93 Jan 1 and above 14 percent by the end of 2012.
The employee contribution is currently governed by a Mississippi attorney general’s opinion that the contribution can not be increased without a corresponding increase in benefits.
The $20 billion PERS fund covers 86,000 public service retirees whose ranks include former state, county and city workers and public school and community college teachers and administrators. Nearly a quarter million current workers are enrolled in the defined benefits plan.
Barbour said estimates are that the retirement trust is under-funded by more than $12 billion. He noted that before legislators “wrong-headedly” enhanced benefits in 2001, the trust’s assets-to-obligations ratio stood at a highly desirable 88 percent.
Today’s current asset ratio is 62 percent, and assumes 8 percent earnings by the fund. Should earnings slip to a 5.4 percent, “The multiple will be far, far less than 62 percent,” Barbour said at last week’s press conference.
One likely consequence of further slippage in the asset ratio would be an increased cost of borrowing for the state, he said, because the condition of the retirement trust is ‘part of the calculus on what it costs us to borrow money.”