Molly & Steve re: Further enhancements for retirees in SB 190

From: Molly Janczyk

To: Steve Buser

Sent: Monday, January 23, 2006

Subject: Further enhancements for retirees in SB 190: Steve Buser: SB 190:

Question:

Older retirees received further enhancements from SB 190: They were taken up to 85% of their original purchasing power.

I don't understand this statement. Put it very simply, please.

I do understand that older retirees rec'd NO COLAS or COLAS that fluctuated and did not always meet inflation. NOW ALL RETIREES RECEIVE COLAS AND THEY ARE ALWAYS AT 3%.

I DO understand that BUSER DOES NOT FEEL HE SAID TO MAINTAIN THE INCENTIVE FOR 35 YRS, MUCH MORE WOULD HAVE TO BE PAID BY ACTIVES INTO THE SYSTEM AS I FORWARDED EARLIER. My apologies, Steve.

Plus, the increased contributions WOULD have actives ((AND THEY SEEM TO ACCEPT THIS TO THEIR CREDIT)) paying much more than we contributed into system with a 2.5% planned additionally.

It appears what is done does not cost us ; that retirees cost the system nearly $1 billion for SB 190 and $1.3 billion for the actives which is proportionately more spent of retirees: nearly 50% went for 100,000 retirees and a bit over 50% for actives. Retirees are far better off it seems, with 3% vs. none or lower ones AND with increased formulas for all which far outweigh 13th cks stopped at about the time of SB 190. I did not understand all of this and do better now, and feel better about the entire perception of the board and decisions made on these issues.

Let's get the legislation to inc. contributions done.>

COMMENTS BASED ON THE REPORT????????

From: Steve Buser

To: Molly Janczyk

Subject: Re: Steve Buser: SB 190: STRS BOARD:35 Yr. Incentive plan

Date: Mon, 23 Jan 2006

I think you have done a pretty good job summarizing a highly complex issue. You might want to add a qualifier noting that, at the risk of muddying the water even further, there were couple of other enhancements to benefits that also added to the cost of SB 190 .

First, there was a provision for older retirees that increased their benefit to at least 85% of their original purchasing power. Note that when some older members retired there was not COLA and/or COLAs did not always keep pace with inflation. For actives, in addition to the specific rule for 35 years, SB 190 also increased the incremental rate from 2.2% per year to 2.5% for year 31, 2.6% for year 32, and so on. Of course, these incremental increase probably also deserve part of the credit for the changing pattern of retirements - along with increasing HC costs, as you mention. As a result, I am not sure if it is even possible to provide air tight precise answers, or even clear estimates, of the various component effects of SB 190.

One of the few conclusions I have heard that I regard as reasonably reliable is that when SB 190 was considered, STRS thought the net long term cost would be roughly $2.3 billion. That estimate appears to be holding up for SB 190 as a whole. STRS also thought that the amount of the total benefit would be shared roughly 50-50 by members who had already retired and members who had not yet retired (along with future teachers who had not even been hired yet). This split also appear to be at least close to what was expected.

With the benefit of hindsight, I think SB was too aggressive in total. If STRS had limited the increases to, say, half of the actual amount in SB 190, STRS would have been in a better position to weather the financial storm of 2000-01. Given that we cannot go back in time, I would prefer to try to increase investment returns, beyond the current target rate of 8%. In addition, rather than scale back benefits to any group, I would like to encourage staff to try to figure out ways of measuring the relative effects of things like SB 190 across various groups of members. If we can identify groups that got far less than there fair share of the $2.3 billion increase in benefits, or who are currently receiving far less than their fair share in terms of total pension benefit for any reason (not necessarily SB 190), then I would favor making adjustments as needed to at least blunt the inequities. Based on my reading of your latter points below, I think you and I are in agreement on this point.

As for the specific quote you asked about, "I thought you were quoted as saying if the 35 yr incentive was to make money for STRS, actives would have to pay much more into system.", I do not recall saying it. Unfortunately, as you have not doubt noted, I tend to talk a lot. So who knows what I might have said. But if I did say it, I would not want to try to defend it. In fact, subject to various ambiguities, including your observations about HC premiums, I would still bet (although not very much money) that STRS is saving a modest amount from the incentive program. Yet "modest amount" is the key word. The absolute costs are large as are the absolute savings. But the difference, while difficult to measure with any precision, is likely to be small.

One way to think about the incentive program is to note that Social Security also has an incentive program. In fact, SS increases the pension benefit by 6 to 7% for every year a potential retiree delays retirement. Over a 5 year period, the incentive amounts to an increase of roughly 40% in the pension benefit! Yet SS still thinks it save more by not having to pay anything for the 5 years. Of course, the Feds might even be more confused than we are on this issue.

Steve

P.S. As an STRS member myself, and on behalf of other STRS members, I want to thank you for trying to sort this out for others and for your reporting efforts more generally.