The Failure of Government Pension Programs

A good example of a state government benefit program, that is failing the people of the state of Colorado, is the Public Employees Retirement Association (PERA). All Colorado public employees and employers must participate in PERA, which is a pension system designed to collect funds to pay for employee’s retirement. PERA includes teachers, state troopers, local government, judicial employees, and so forth. Here are some of the shortcomings of PERA that has lead to billions in unfunded liabilities that will eventually have to be paid for by Colorado taxpayers:

•Like many government retirement plans, PERA is a “benefit” plan which is much different than “contribution” plans.
•The PERA board of trustees is run by government bureaucrats who know little about money management and investing. PERA investments are failing miserably. A huge reason for PERA consistently failing to meet is annual rates of return on their investments is because they do not diversify their investments. In other words, they fail to hedge investments against the collapse of economic bubbles such as the dotcom and financial industry caused recessions over the past decade.
•PERA, like many government run bureaucracy programs, is influenced by both political and special interests. For instance, unions use their power to obtain outrageous benefits for its members.
•PERA operating expenses are much higher than those of contribution retirement programs.

To compensate for the unfunded liabilities PERA has to continually enacted changes to the program such as:

•PERA has increased the amount employees and employers must contribute to the plan. What’s worse is that increased contributions do not necessarily correlate to higher retirement payouts.
•Other changes in benefits include increasing the retirement age, lowering the cost of living adjustment, restricting portability, and raising vesting requirements. What’s worse is that these PERA rule changes are biased towards older workers. In other words, benefits vary for each employee. For instance, older workers generally have lower contribution rates and can retire at an earlier age than newer employees.
The solution for these PERA shortcomings is to change their “benefit” program to a “contribution” program similar to corporate 401Ks. Here are some benefits of making such a change:

•Contribution plans would equate to lower costs since it would lower overhead expenditures because it is a simplified system. It would also eliminate future unfunded liabilities that taxpayers will have to endure. This means lower contribution rates for employees and employers as well as lower taxes for citizens.
•It lowers investment risk on both the individual because programs are run by financial experts and on the taxpayer because it lowers unfunded liability risks.
•There is greater transparency in contribution plans since each individual is responsible for their own investment accounts.
•It would remove vesting requirements since individuals will be vested immediately at day one.
•Contribution plans are fair with consistent rules for everyone.
•Contribution plans would remove political and special interest influences.
•Contribution plans are portable. If, for example, an employee changes jobs outside of PERA, their entire account is portable and can be rolled over into their new employers 401K. Today, PERA employer contributions are not portable.

This PERA example is applicable to any state or federal government run benefit program including social security and Medicare. All of these benefit programs are running up huge unfunded liabilities that are coming back to haunt taxpayers and retirees. Today, it is estimated that state and federal pensions have over 1 trillion in unfunded liabilities.

Much of the information in this blog was obtained from Barry Poulson who has been recording PERA shortcomings for years