Article: (Oregon) Pensions in PERS decline

Pensions in PERS decline

Data show reforms in 2003 cut big payout levels of 1999-2001

STEVE LAW
Statesman Journal

December 12, 2005

Newly retired Oregon teachers, state workers and other public employees are getting smaller pensions compared with the payouts of a few years ago.

Workers who retired in 2004 after 30 years on the job earned pensions that averaged 79 percent of their salary, new Public Employees Retirement System data show.

That still is better than what most other government and private pensions are paying.

But it shows that Oregon's 2003 pension reforms brought PERS payouts down to Earth from the stratospheric levels of 1999-2001, when hundreds of public servants retired in their early 50s on pensions rivaling or topping their salaries. That caused skyrocketing government benefits costs and a brain drain of experienced teachers, firefighters and state managers.

"I think it means that the reforms are working," said Rep. Greg Macpherson, D-Lake Oswego, one of the architects of the 2003 reforms. "The old PERS Board made some really poor decisions, then benefits spiked up higher than anyone intended they become."

PERS had stopped compiling data about "replacement ratios" -- a standard measure showing how much of an employee's salary will be replaced by his or her pension -- after the average pension for 30-year workers hit 106 percent of salary in 2000 and 105 percent in 2001. Those numbers became a lightning rod for public criticism of PERS, intensifying the backlash against government workers.

Now a new PERS analysis, which slightly reworked some of the old figures, shows pensions as a share of salary have been falling four years in a row for each new crop of retirees, starting after the 2000 stock market downturn. The biggest drop was for 2004 retirees, who left government service just after the Legislature enacted a trio of major PERS reforms.

The average pension for 2004 retirees with 30 years' experience was $45,325, down from $51,022 the year before and the lowest of the past six years.

Gov. Ted Kulongoski, who championed the 2003 reforms, said they are having the desired effect.

"I think that most people recognize that in public service, the system wasn't designed to give you 100 percent replacement of your earnings at the end," Kulongoski said. "If the replacement ratio is 79 percent, when you factor in Social Security, I still think that is a substantial retirement."

PERS Executive Director Paul Cleary predicted that pensions for future retirees will continue dropping in relation to workers' incomes.

"We're a different system than we were prior to the reforms," Cleary said. "You basically have seen the peak of the replacement ratios; from here on out it's going to decline."

Retirees are concerned

Keizer resident Kathryn Paeske, 59, who retired last year after more than 30 years of teaching, said that pensions equalling 79 percent of salary aren't enough.

"I retired at age 58 and have to wait until age 65 to start becoming Medicare-eligible," Paeske said. "If your retirement benefits are significantly less, your expenses, especially your health expenses, have increased substantially, and I don't think that's being factored in."

Paeske returned to the classroom as a substitute teacher, trying to work at least two days a week so she can continue to earn health-care benefits.

Jefferson retiree Jerrilyn Henson, who logged 21 years as a state worker, said that improving public-employee pensions in Oregon stemmed from good investment returns, "and other people got jealous."

"I kind of hate to see it go way down," she said. "It would be nice if it would stabilize so that those of us who did retire can afford to live in the lower echelons."

Fight about benchmark

Many public employees and union leaders decry the use of information based on workers serving 30 years, arguing that it exaggerates what the vast majority of PERS members earns from the pension fund.

Only about one-fifth of PERS members last 30 years in the system, Cleary said. PERS pensions for all 2004 retirees, regardless of how long they worked, averaged 59 percent of final salary, he added.

But it's difficult to evaluate how all those retirees are faring financially, as some worked as little as five years to get vested in PERS. Many have 401(k)s, pensions from other states or other retirement plans to supplement their Oregon pensions.

Workers may not know the term, but they use a replacement ratio when they ponder whether to retire and decide how much of their salary will be replaced by their pension, plus Social Security and other assets.

A 30-year replacement ratio is the standard way to compare benefits from one pension plan to another, and to gauge how much a pension pays.

Thirty years is considered a full career, Cleary said. PERS requires 30 years of service before most can qualify for early retirement.

The traditional PERS benefits formula was devised to pay pensions equalling 50 percent of workers' final salary after 30 years, or 60 percent for police and firefighters. Those original targets were blurred by a series of policy decisions, such as the addition of the Money Match option and generous payouts by the PERS Board, which enabled workers to get much higher pensions.

When the 2003 Legislature created the Oregon Public Service Retirement Plan for new public employees, it guaranteed pensions equalling 45 percent of salary after 30 years. That, combined with the new individual investment accounts, should yield pensions projected at 65 percent to 67 percent of salary, Macpherson said.

When you add in Social Security, "that means they won't suffer a major drop in their living standard when they retire," Macpherson said.

Financial planners often suggest workers shoot for pensions of 70 percent to 80 percent of their salary once Social Security is factored in, Cleary said. That's because retirees typically have lower or no mortgage payments and spend less on commuting, work clothes and other items.

"Recently, they've been jacking that up to 80 to 90 percent because of the cost of health care and long-term care," he said.

PERS off the charts

A series of policy decisions by the Legislature and PERS led to unprecedented pensions exceeding those levels for people retiring in the late 1990s and early 2000s.

The typical worker retiring in 1990 after 30 years in PERS got a pension averaging 60 percent of salary, not counting Social Security. In 2000, that zoomed up to 100 percent of salary, new PERS data show. Once Social Security kicks in, those workers will make far more in retirement than they ever earned on the job.

The pattern is the same even when all PERS retirees are included, regardless of the number of years worked.

In the first four years of the 1990s, less than one in 300 new PERS retirees got pensions topping their salaries.

In the first four years of the 2000s, more than one in seven new PERS retirees topped their salaries.

In 2004, one in 20 new retirees topped his or her salary, a sign that the bubble is beginning to burst.

Experts say the goal of a public-employee pension is to recruit and retain good workers, then take good care of them once they retire. Pensions that top worker salaries detract from those goals.

"You're creating an incentive for people to leave at a point in their career when they have all this experience, and that's experience you may want to draw on," Macpherson said.

Still beats other states

No other U.S. public pension system routinely grants pensions that surpass salaries, as PERS was doing during the peak of the bubble. Only a few public pension systems rival the 79 percent of salary granted by PERS to career employees last year.

"Your replacement ratio would appear to be higher than typical public employers in other states," said Keith Brainard, the research director for the National Association of State Retirement Administrators.

A 2004 survey by his organization and the National Council on Teacher Retirement showed only a handful of public pension systems paying 80 percent to 90 percent of workers salary after 30 years. Those include San Diego County, which is in deep financial trouble, New Mexico and a smattering of funds for police officers and firefighters.

The median pension for all public plans is 55.5 percent of salary after 30 years, Brainard said. That means that half pay more and half pay less than that amount.

Ron Snell, a state finance expert at the National Conference of State Legislatures, estimated that fewer than 10 public pension plans pay 75 percent of salary or more after 30 years.

And in some of those states, such as Colorado, Massachusetts and Kentucky, public employees don't get Social Security benefits to supplement their pensions.

Cleary, the PERS executive director, said it's crucial to include retiree health-care benefits when comparing state plans. Some states provide retiree health-insurance costing $700 per month, he said, while PERS has only a modest benefit worth $60 per month, only for people eligible for Medicare.

That will become clearer after 2007, Cleary said, when public pension plans must begin counting retiree health-care obligations when calculating their funding shortfalls.

Beats private sector

In general, public employees get far better retirement packages than people in the private sector.

Nationally, the average pension for a public employee in 2003 was $16,188, compared with $7,200 for the private sector, according to the Employee Benefits Research Institute.

Employer costs for public pensions averaged $2.23 for each employee hour worked in September 2004, compared with 85 cents in the private sector, according to the Labor Research Association.

But those comparisons can be misleading. Many small businesses offer no retirement benefits or minimal plans. If government employers are compared to corporations of equal size, the gap narrows.

Public employees, more than half of whom work in schools and colleges, tend to be better-educated than private-sector workers. And 37 percent of public employees have unions to bargain for their benefits, versus only 8 percent of private-sector workers.

Although PERS pensions are coming down, taxpayers must bear the bill for past bloated pensions for the next three decades.

PERS has a long-term shortfall estimated at $6.7 billion. State and local government costs for pension benefits are higher than ever in Oregon and are expected to rise higher in mid-2007.

"The problem for those that are currently trying to adopt budgets is for the years PERS was out of control, where the horse has left the barn," said former House Majority Leader Tim Knopp, a Bend Republican who shepherded the 2003 reforms through the House.

The courts may have reduced lawmakers' options for lowering PERS costs, he said, "but I really think it's an issue that needs to stay at the top of their agenda."

Kulongoski, who has taken hits from public employees angered by the PERS reforms, said reformers should be given more credit.

"I actually think that the reforms saved the system," he said. "In time, it will be viewed that way."

slaw@StatesmanJournal.com or (503) 399-6615

A closer look

Share of new PERS retirees getting pensions higher than their salary at retirement (includes all retirees, regardless of number of years worked in PERS before reaching retirement age):

1990-94 retirees: 0.3%

1995-99 retirees: 8.7%

2000-03 retirees: 15.5%

2004 retirees: 5%

SOURCE: PERS