It’s time to make PERS sustainable

by Senator Doug Whitsett

Failure to make changes in PERS could result in the collapse of the retirement system and the loss of retirement benefits to all those who have earned them

More than 95% of Oregon’s current and former public employees participate in the Public Employees Retirement System.

PERS has more than 330,000 members that have earned retirement benefits. About 170,000 members are currently working for the state or one of its political subdivisions. Nearly 120,000 members are already drawing retirement benefits. Another 40,000 members, who are no longer working for the governments, have earned benefits payable when they reach retirement age.

The money required to pay these current and future benefits comes primarily from two sources.

The PERS Trust Fund is the System’s reserve account that has been built up over more than sixty years to help pay benefits to those who have retired. About seventy percent of annual PERS revenue is derived from the return on investment on that reserve fund account. The other thirty percent of annual revenue comes from employer and employee contributions to the fund.

As late as 2007, the PERS obligation to pay retirement benefits was considered fully funded with more than $60 billion in reserves. Unfortunately, much of that reserve fund was invested in volatile stocks, real estate investment trusts and even in derivatives.

I was one of a few Legislators that expressed deep concern regarding the potential volatility of those investments during the height of the investment bubble in 2006 and 2007. We were worried that the markets were unsustainable. We counseled those responsible for investing the retirement funds to reinvest much more of the trust reserves into safer, more stable and more conservative investments. Our advice was uniformly disregarded.

The PERS Trust Fund subsequently lost about $18 billion during the 2008 market crash. It currently remains underfunded by as much as $16 billion as the direct result of those losses.

Originally, PERS was structured so that both the employing government agency, and their employees, each paid an amount equal to six percent of the employees’ income into the PERS Trust Fund.

Over the years, most government employers have made collective bargaining concessions that have resulted in the government employers paying both their six percent and the employees’ six percent of the PERS contribution.

This has been called the six percent pick-up.

Today, more than seventy percent of all Oregon public employees, including all state employees, have their entire pension contribution picked-up and paid for by their employers. The employer is also responsible for paying all other costs of maintaining the retirement system.

This means that the entire cost of retirement benefits is ultimately paid by Oregon taxpayers for seventy percent of PERS covered employees. The remaining thirty percent pay only six percent of their salary toward their retirement program.

In order to keep PERS solvent, the taxpayer contribution to the fund was increased by about one billion dollars during the current two-year budget cycle. For the same reason, it will be increased by about $900 million more during the next two-year budget cycle, in order to meet its actuarial liabilities.

That amount will be equal to between 26 and 27 percent of Oregon government payroll. Government employers are also obligated to contribute 6.25 percent of their employees’ wages to social security. Therefore, fully one third of Oregon government payroll will be dedicated to employee retirement contributions. This one third of payroll contribution will be required to be made each year into the foreseeable future just to keep PERS solvent.

I estimate the total Oregon taxpayer contribution to PERS during the next two year budget cycle will be well more than three billion dollars.

This bleak prediction assumes that the PERS Trust fund continues to achieve an eight percent annual return on investment. The cost of PERS taxpayer contributions may go even higher in the likely event that the investment returns are less than eight percent. That taxpayer contribution would necessarily have to increase by more than two percent for each percentage point reduction in return on trust fund investment.

This situation is clearly unsustainable.

The current estimated cost of PERS statewide contributions would fully compensate more than twenty five thousand average state employees. That is more than twenty five thousand employees, such as teachers, policeman and fireman, who will not be working, and who will not be providing critical services to the people of Oregon, into the foreseeable future.

We are certainly obligated to keep our promises to our public employees. We must, and should, pay the retirement benefits promised and earned to those employees that have already retired. We are also obligated, both morally and legally, to pay current public employees all of the benefits that they have earned to date.

But we can, and must, prospectively change the system to make it affordable and functional into the future.

At best, the status quo will ensure continuing unsustainably high costs and inadequate public services. At worst, it may result in the collapse of the retirement system and the loss of retirement benefits to all those who have earned them.

I have at least a dozen legislative concepts currently being drafted that are designed to make certain that PERS remains solvent and affordable. Several of our Republican colleagues are also having plans drafted for PERS reform.

Several of us have recognized this approaching financial wreck. We have attempted to avoid this untenable situation by introducing a number of similar measures during past legislative sessions. None of these bills have even been afforded the courtesy of a public hearing by the Democrat leaders who hold majority control of the Legislature.

It is past time to take responsibility for this failed retirement structure. We hope to work in good faith with that majority during the upcoming session to achieve changes adequate to stabilize PERS into the future.

Senator Doug Whitsett is the Republican state senator representing Senate District 28 – Klamath Falls

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Posted by at 05:00 | Posted in PERS, Public Employees Retirement System | 40 Comments |Email This Post Email This Post |Print This Post Print This Post

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