Pension financing experts say it will take “shared sacrifice” in order to solve the crisis of unfunded liabilities facing current and future retirees.
Greg Smith, executive director of the Colorado Public Employees’ Retirement Association, said Colorado coined the term “shared sacrifice” when it began its push for PERA reform in 2009.
The state faces at least $23 billion in unfunded pension responsibilities, much of which was exacerbated by an economic downturn that began in 2008, sinking investments and causing pension managers to scramble for a solution.
“We can’t run out of money. We’re having people pay into the system that are new hires and we’re promising them a benefit in 30 years and our own finances show that we won’t have any money in 30 years. That doesn’t work,” Smith said Tuesday at a meeting of the City Club of Denver at the Brown Palace Hotel.
Smith believes PERA is a model to other states because in 2009, leaders traveled the state to have an open and honest conversation about the crisis facing the state’s pension system, including acknowledging the gap in funding.
“I can tell you that our peers around the country were horrified because we went around the state and said, ‘We’re going to run out of money, you’d better join with us in coming up with a solution because otherwise you’re going to wind up with nothing,’” said Smith.
The compromise that was reached included workers taking a hit on their annual cost of living adjustment, while employers increased contributions.
Smith chuckles when he hears critics of PERA suggest that recipients are benefiting from so-called “Cadillac” plans, in which they are being paid exorbitant amounts of money. In reality, the average benefit of the 104,000 recipients is $3,030 per month before taxes.
“That’s hardly anything that anybody is going to their country club with, and they don’t have Social Security,” explained Smith. “It’s that and their personal savings is their entire three-legged stool.”
Since the Great Recession, PERA has seen improvement. Some of the uptick has been a result of the reform legislation finally passed in 2010. But much of it simply has to do with the end of the economic downturn.
PERA started last year with $40.2 billion in the bank and took in $2 billion in contributions from employers and employees. It had $5.8 billion in investment growth and distributed $4.2 billion to members. The result is that PERA grew its account to $43.8 billion.
“I wish every year looked like that,” joked Smith.
While he is optimistic for the future of PERA, the pension fund executive acknowledges that the state still has a long way to go to realize a 30-year fix to the problem, which was outlined by the reform legislation.
“It’s 30 years of discipline to get those lines back together, but it works at the end of the day,” opined Smith.
Colorado is not unique in terms of the national overview. Statistics indicate that unfunded pension obligations in America total $833 billion — a figure that is expected to grow in the near future.
Denver-based economist Chris Blackwood works to solve pension issues every day, serving as director for PFM Asset Management. He summarizes the catastrophe that the state and nation could be facing by pointing out that the assets owned by retirees account for nearly a third of all of the nation’s invested capital.
“Managing the situation is in all of our best interests and the interests of our kids and grandkids…” Blackwood explained to the City Club of Denver crowd. “It’s going to take a long time of very painful decision making.”
The economy hasn’t been the only factor leading to the problem. Life expectancy has increased, which has added to problems, and Baby Boomers are only compounding the dilemma.
There are currently about 35 retirees for every 100 workers, explained Blackwood. But that number is expected to increase to 51 retirees for every 100 workers over the next 50 years, which will only further burden the system.
“There’s a lot more pressure on the workers to support retirees,” he explained.
The crisis is realized when personal savings is taken into account. The average person only has $120,000 saved for retirement, which makes pension systems a critical support system as workers head into their golden years.
But solving the situation is difficult on both an economic and political level, explained Blackwood. For one thing, pension managers may want to make excess contributions to work towards solvency, but politics often gets in the way of such appropriations.
“When things go bad, it is very politically difficult to make these excess contributions, and if you don’t you just start to get behind and kick the can down the road in the long run,” said Blackwood.
One solution is to ask voters for a tax increase to solve the problem. But of course such a request has political implications as well.
“Many of us in the room say we don’t want to pay for this, it’s not our issue in the big picture…” Blackwood pointed out. “We think it might be too expensive. But the employees feel like… this is a guaranteed benefit. ‘I should be getting this in the long run for my retirement. I need this funding.’”
Unfortunately, explained Blackwood, doing nothing and relying on a sound rate of return is not enough security. He pointed out that the current system is unsustainable.
“It’s not like your federal government. You can’t just print money to fill the hole,” said Blackwood. “These are real dollars with real problems that have to be solved.”
The good news, however, is that there are many ways to get the system back on track, according to Blackwood. Many of the ideas are a bit creative, such as asset monetization, where a government sells an asset to the private sector for immediate revenue.
But economists agree that in the end the issue still comes back to shared sacrifice. As Blackwood pointed out, “There’s pain. There’s pain across the spectrum on this for both the employer and the employee.
“They might be equally mad, but it’s the best solution for everybody in the room,” he continued. “Shared sacrifice is the common theme of successful solutions in this pension space.”
Colorado Treasurer Walker Stapleton agreed that the issue is about managing expectations.
Stapleton, a Republican, has been at odds with both the PERA board and employees for suggesting such aggressive moves as increasing the retirement age, lowering the projected rate of return on investments and reducing cost-of-living raises.
Stapleton even filed a lawsuit seeking to open the books of the PERA fund.
Part of managing expectations includes a greater shared sacrifice, he said last month, suggesting that everyone needs to give even more than what was agreed upon with the reform legislation.
“PERA is a challenge because when people have an economic stake in maintaining the status quo, as so many people in PERA do on both sides of the political aisle and so many members do, people don’t really like the idea that they’re going to have to engage in a process of shared sacrifice in order to make the system better,” opined Stapleton.
“The natural inclination is to say I’m happy to have my neighbor engage in taking less, but I’m not willing to take less myself…” he continued. “If everybody sacrifices a little you can fix the system properly.”
Stapleton acknowledged that his opinions and suggestions have caused people to say “ugly” things about him. But he believes, “I may be the guy who is actually trying to save it,” pointing to such places as Detroit, the nation’s largest bankrupt city.
City workers there must decide whether to accept pension cuts, or risk losing much more.
“Why would you want to put your retirement in those shaky hands?” asked Stapleton. “That’s a terrible disingenuous promise to be making to public employees, and my goal from the beginning of this… is that we need to design a system in Colorado that can afford to pay for the promises that we are making to public employees.”
He called legislative reforms an “incremental step in the right direction,” but said further steps must be taken to account for a more realistic rate of return.
On a larger level, Stapleton points out that unfunded pension obligations impact other aspects of government, including education. Stapleton opposed a ballot measure last year that would have raised nearly $1 billion for K-12 education because he was fearful that the money would have been used to backfill education pension responsibilities. Voters rejected the proposal.
“Unless we are serious about rolling up our sleeves and proactively solving PERA, we’re not going to get the education reform that all of us want in Colorado,” he said.
He added that PERA reform is impossible without transparency, which is why he is suing to open the books of the PERA fund.
“Without transparency you’re not going to have any catalyst for reform,” opined Stapleton. “People are going to be able to whistle a happy tune as they walk past the graveyard and deny that a math problem exists, but when you’re confronted in stark terms with how to pay for things… there’s no denying a math problem.”