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PERA is a Disaster in the Making

 

Pension Failures Leave Taxpayers Holding the Bag

Colorado’s public pension system is in serious trouble. The Public Employees’ Retirement Association (PERA) is underfunded by tens of billions of dollars and getting worse every day. Unless Colorado takes steps to fix the problem, retirees will see their pension promises broken, and taxpayers could be forced to pick up the tab for spiraling pension costs. At the same time tax dollars would likely be diverted away from classrooms, infrastructure, and public safety to pay for pensions.

The PERA System:

PERA is the retirement system for teachers and other government employees. These employees and the state government make payments into funding pools which are then invested in order to pay for retirement benefits.  When that employee retires they are given a monthly payment based on the number of years they worked, their age and their highest 3-year average salary. This payment is guaranteed for life and will increase every year by either two percent or the rate of inflation, whichever number is lower.  The monthly payments for the retiree are taken from the shared funding pool and total payments can be much greater than what the employee and state paid in plus the investment returns.   
 
Pension funds are supposed to maintain a large enough reserve of funding to not only pay current retirees but invest those funds for future retirees. 
 
Unless they’re managed responsibly, pension plans can become unsustainable and, ultimately, insolvent.

PERA is the retirement system for teachers and other government employees. These employees and the state government make payments into funding pools which are then invested in order to pay for retirement benefits.  When that employee retires they are given a monthly payment based on the number of years they worked, their age and their highest 3-year average salary. This payment is guaranteed for life and will increase every year by either two percent or the rate of inflation, whichever number is lower.  The monthly payments for the retiree are taken from the shared funding pool and total payments can be much greater than what the employee and state paid in plus the investment returns.   
 
Pension funds are supposed to maintain a large enough reserve of funding to not only pay current retirees but invest those funds for future retirees. 
 
Unless they’re managed responsibly, pension plans can become unsustainable and, ultimately, insolvent.

Why the PERA System is Broken:

Today most workers have a “defined contribution” plan where employers and employees contribute to a personal retirement account for each employee. These plans are also portable and some workers can maintain their plan even if they change jobs or careers. This retirement account is then used by individuals to fund their retirement. By contrast, Colorado government employees have a “defined benefit” plan in which all employees draw retirement income from the same pool. Additionally, payments are guaranteed for life regardless of how much each employee contributed, so many individuals can take out much more than they ever contributed.   
 
While defined benefit plans are generally more expensive, states could choose to fund them fully by guaranteeing the full actuarily required contribution (ARC) payments each and every year.
 
Unfortunately, politicians would rather spend that money on projects today, often leaving pensions woefully underfunded. 
 
To make matters worse, Colorado’s legislature passed a law that has allowed them to chronically underfund PERA for over a decade.  This has caused PERA’s unfunded liabilities and costs to taxpayers to both skyrocket.

When a pension fund’s balance starts running low, payments from employees and the state government will be used to fund the pensioner’s retirement, rather than being invested to fund future obligations.
 
To make ends meet, states will have to raise taxes, while cutting funding for core functions of government such as schools, public safety and infrastructure.

Today most workers have a “defined contribution” plan where employers and employees contribute to a personal retirement account for each employee. These plans are also portable and some workers can maintain their plan even if they change jobs or careers. This retirement account is then used by individuals to fund their retirement. By contrast, Colorado government employees have a “defined benefit” plan in which all employees draw retirement income from the same pool. Additionally, payments are guaranteed for life regardless of how much each employee contributed, so many individuals can take out much more than they ever contributed.   
 
While defined benefit plans are generally more expensive, states could choose to fund them fully by guaranteeing the full actuarily required contribution (ARC) payments each and every year.
 
Unfortunately, politicians would rather spend that money on projects today, often leaving pensions woefully underfunded. 
 
To make matters worse, Colorado’s legislature passed a law that has allowed them to chronically underfund PERA for over a decade.  This has caused PERA’s unfunded liabilities and costs to taxpayers to both skyrocket.

When a pension fund’s balance starts running low, payments from employees and the state government will be used to fund the pensioner’s retirement, rather than being invested to fund future obligations.
 
To make ends meet, states will have to raise taxes, while cutting funding for core functions of government such as schools, public safety and infrastructure.

How PERA’s Broken System Hurts Coloradans:

There are already signs that PERA is in trouble. This year, administrators announced the pension system is short more than $32 billion dollars.  That is likely a gross underestimation since PERA officials are using unrealistic assumptions for projecting their return on investments.

Using a more realistic rate of return as the Government Accountability Standards Board does, PERA is actually $50 billion dollars in the hole when one uses
 
In order to make up for the current deficit every man, woman, and child living in Colorado would need to pay $10,000 to the pension program.
 
And that’s not all of the bad news. This problem is rapidly growing worse. Over the past decade, the funding gap has more than doubled. In the most recent year, the funding gap grew more than 20 percent.

There are already signs that PERA is in trouble. This year, administrators announced the pension system is short more than $32 billion dollars.  That is likely a gross underestimation since PERA officials are using unrealistic assumptions for projecting their return on investments.

Using a more realistic rate of return as the Government Accountability Standards Board does, PERA is actually $50 billion dollars in the hole when one uses
 
In order to make up for the current deficit every man, woman, and child living in Colorado would need to pay $10,000 to the pension program.
 
And that’s not all of the bad news. This problem is rapidly growing worse. Over the past decade, the funding gap has more than doubled. In the most recent year, the funding gap grew more than 20 percent.

The PERA Solution:

Colorado implemented some minor reforms in 2010, but PERA is still headed toward disaster. Colorado needs to change its out-of-date retirement system and move to a model that is seen in the private sector. This will not only give employees portability and flexibility in their retirement, but also lessen the burden on taxpayers.

Colorado implemented some minor reforms in 2010, but PERA is still headed toward disaster. Colorado needs to change its out-of-date retirement system and move to a model that is seen in the private sector. This will not only give employees portability and flexibility in their retirement, but also lessen the burden on taxpayers.

Sign the Petition:

PERA’s own administrators say the system is short more than $32 billion dollars. And the actual amount of pension debt is probably closer to $50 billion. This scheme is not sustainable – we must reform this system before Colorado taxpayers are on the hook. I urge you to update Colorado’s pension system and give public employees more control over their own retirement while protecting taxpayers and current retirees.

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