One of the most important issues facing the state of Oregon these days is the brokenness of its Public Employees Retirement System (PERS). In order to provide you with a holistic understanding of the situation, this post will be the first in a series discussing PERS reform. In this post, we will discuss the major problems with the system. In subsequent posts we will discuss some proposals to fix PERS, as well as the impact of the current system and proposed reforms on some of the major stakeholders.
As The Oregonian has been reporting for several months months, PERS has been the subject of contentious debate, particularly among the teachers and school administrators who are most visibly affected by its failings and attempt to reform it. The Public Employees Retirement Fund – which pays out pensions to public school teachers and professors at Oregon’s public colleges and universities, among other public employees – is facing a $16 billion actuarial shortfall. While there are several factors involved in this imbalance, the most significant is the Money Match pension formula, which is driving a $1 billion increase in pension costs for government employers.
Money Match Causes Problems for PERS
Money Match, a pension formula that Oregon lawmakers adopted in the 1950s, and which is open to every public employee hired before August 29, 2003, is generous to its beneficiaries. Employees who left in PERS the contributions they and their employers had made to their accounts saw amazing returns on their investments, particularly in the boom years of the stock market (from the 1980s until 2007). Oregon guaranteed an annual return of 8%, and when the stock market did particularly well, the PERS board – many of whom are beneficiaries of the system – credited those additional investment earnings into beneficiary accounts, rather than reserving them for a time when money might be tighter.
The system is also generous in other ways. As one might guess, Money Match also doubles the existing balance an account member has at the time of retirement and converts that balance into an annuity based on his or her life expectancy. As the account holder draws out money in the form of pension payments, the balance still continues to earn the annual 8% interest guaranteed by the state (whereas annuities in the private sector normally work from a 4.5% interest rate). Finally, PERS beneficiaries are allowed a yearly cost-of-living adjustment, which is capped at 2%.
The Money Match system, which reached its peak of generosity around the year 2000, has led to a situation in which even individuals who worked only briefly as public employees in the state of Oregon can expect large payouts, as long as they were hired before 2003 (when the last set of PERS reforms occurred). For example, George Dawson, who worked as a law professor at the University of Oregon from 1970 until 1980, now draws in pension benefits 310% of his final annual salary there – while still working as a law professor in Florida. Dawson is not the only person to be benefiting so handsomely, and under the current system, there is nothing wrong with his doing so.
How – indeed, whether – this plan should be reformed is still a subject of significant debate, with beneficiaries arguing that they should not be punished for a system they did not create. However, it seems clear that any system that adds over one billion dollars in pension costs will be subject to some sort of overhaul.