Colorado’s public pension system is a disaster in the making
Author: Jesse Mallory - November 8, 2017 - Updated: November 7, 2017
Colorado’s public pension system, the Public Employees’ Retirement Association (PERA) is in serious trouble, and if it continues on this same track, just about everyone in the state will feel the pain.
Of course, it’s not too late. Colorado could get this right. But only if it learns from the past and embraces a new way of giving public employees more control of their own retirement while also protecting taxpayers and current retirees.
Unfortunately, there’s reason to worry. The status quo increases the likelihood that critical tax dollars may be diverted from classrooms, infrastructure projects and public safety in order to pay for a spiraling public pension crisis in the not-too-distant future.
The irony is that we’ve been here before.
Just a few years ago PERA found itself in a similar situation. Neglected and underfunded by tens of billions of dollars, the fund was facing the possibility of breaking promises to hundreds of thousands of Colorado government employee retirees, including former public-school teachers, judges and state troopers.
But in the end, an agreement was reached that some thought would solve the program’s short-term problems while setting it on a path toward fiscal solvency. Unfortunately, the changes to the pension system consisted of a lot of window dressing while relying on a number of faulty assumptions that never materialized. Among the biggest mistakes was failing to consider that retirees are living longer and healthier lives.
Incredibly, Colorado is running the risk of repeating many of the mistakes that have brought us to this point.
As with the previous deal, PERA’s administrators are grossly underestimating the program’s budget deficit and using unrealistic assumptions for projecting their return on investments. Just this year, PERA administrators announced that the budget shortfall for the public pension plan is $32 billion.
But if we are to use a more conservative rate of return, like the one being used by the Government Accountability Standards Board, an organization that looks into state accounting and financial records, PERA’s liability actually exceeds $50 billion.
The real problem with PERA is that it is a defined-benefit system, with payments guaranteed for life and a 2 percent (or the rate of inflation, whichever number is lower) increase every year. And because monthly benefits for retirees are taken from the shared funding pool, total payments are frequently much greater than what’s been paid into the system.
Lynn E. Turner, a PERA board member, describes the arrangement as a “Ponzi scheme.”
One option is to have a state public pension system that provides employees with more flexibility. Unlike previous generations, when employees often worked for one employer for a lifetime, today’s workers are switching jobs more frequently. Recent data from LinkedIn showed that those who graduated between 2001-2005 changed jobs an average of nearly four times in their first post-college decade.
Skeptics may contend that such wholesale changes are possible only in the private sector. But the Pennsylvania model provides us with a useful example of how thinking big in public pension reforms are possible in the public sector, too. The Keystone State recently approved a sweeping reform plan that will move all new employees into a 50-50 defined benefit/defined contribution plan. It’s far from perfect, but it will dramatically reduce the risk of financial insolvency and lessen the risk born by taxpayers.
It’s time to get informed about PERA before things get worse. If we don’t, Coloradoans run the risk of failing to meet the financial obligations we made to government employees, facing massive tax hikes, seeing cuts in essential government services — or a combination of all three.
We can avoid this pain, but only if we begin to reimagine public pensions.