Market Woes Hit PERA

[Bob Nattering]

From Saturday Rocky Mountain News (http://www.rockymountainnews.com/news/2009/jan/17/pera-faces-30-billion-funding-shortfall/) comes more bad news related to the recession. The "former government employees," of course, includes retired teachers:

Colorado's largest pension plan may face a $30 billion funding gap when it finishes examining its books this summer, the Rocky Mountain News estimates.

The Colorado Public Employees' Retirement Association, which serves more than 400,000 current and former government employees, will have investment losses topping $11 billion for 2008. Numbers are not final because roughly 20 percent of the portfolio is in harder-to-value assets such as real estate and private equity. ...

"To take a shot in the dark, in the business we're in, a mistake could cost billions. We need to do all the modeling and have options that make sense for Colorado."

The options studied will include both increases on the contributions side as well as reductions of benefits. The benefits part is the tricky one, as PERA has suggested in the past that it's possible that any member with a day of service in the pension system cannot take a cut in benefits without an offsetting reduction in the amount they pay into the plan.

[Loren Swelk]

Many of my retired college professor and teaching friends are truly worried. To be able to retire at over 100% of your best year's income was kind of Madoff-esque and I have always wondered how long that could last.

[loose cannon]

PERA is a defined benefit plan not a defined contribution plan-- the retirement payments by the covered public employee is not commensurate to what is paid in nor is it like most any other plan out there -- particularly Social Security-- I would love to be covered by such a plan---where my retirement is based on my highest average 3 years of income regardless of what I have paid in --- where the State kicks in twice as much as the employee to the fund & the employee does not have to pay social security ( what a huge break) -- current problems are not just market but management by PERA who every year sought to maximize benefits based on the most generous possible future outcomes of both the market and contributions by the taxpayer. Neither are in good shape right now. No one managed with a rainy day in mind.

[Bob Nattering]

..................-- current problems are not just market but management by PERA who every year sought to maximize benefits based on the most generous possible future outcomes of both the market and contributions by the taxpayer. Neither are in good shape right now. No one managed with a rainy day in mind.

That hits the nail on the head, not just with respect to PERA, but with respect to most of our current economic woes today. The sup-prime and other problem mortgages came from the same rosy evaluation of the future. Ditto for the over-leveraged investment banks, and brokerage firms. Ditto for the corporations that failed to worry about strong balance sheets. Ditto for the consumers with high mortgage and consumer credit debts. There are illegal PONZI schemes and there are legal PONZI schemes. The legal ones include PERA, social security, highly leveraged banks and corporations, etc.

Now it's time to pay the piper and Washington wants to borrow the money for that. Somebody needs to sound the alarm that we are not going to get out of this mess in few short months.

[west4567]

I have a spouse who's in PERA, so I literally have a vested interest in it. At the risk of being accused of bogarting the thread, let me respond to some of the concerns with a few brief posts, rather than a single long speech.

PERA is not an example of government incompetance, but is rather the model that all retirement systems should look to. It costs just a bit more than Social Security, but is far more solvent (I know - I'm setting the bar pretty low). SS is a rip-off - PERA is not.

[west4567]

Bob N, quoting the Rocky, "Colorado's largest pension plan may face a $30 billion funding gap when it finishes examining its books this summer"

PERA had assets of about $40 billion and was close to fully funded. Now those assets are valued at $30 billion. The article does not explain the author's projection of $30 billion in the hole. The PERA folks expect the value of their assets to bounce back (after all, we're talking about liabilities, in the form of retirement payouts, that are 20 or 30 years down the road). PERA is thus not asking for a bailout.

[west4567]

Many of my retired college professor and teaching friends are truly worried. To be able to retire at over 100% of your best year's income was kind of Madoff-esque and I have always wondered how long that could last.

For each year a retiree has worked in the PERA system, the benefit rises by 2.5%. To reach 100%, one must have worked 40 years in the system. During that time, 17% or 18% of the individual's gross income went into PERA (a bit more than half was paid for by the employer).

So, if you invested 17% of all the money you made every year for 40 years, what is the rate of return you would expect? PERA has been making such payouts for close to 80 years, without any artificial supplement. When PERA has been underfunded (as happened a few years ago), they make adjustments to benefits and/or contributions - they haven't gone to the state for a cash infusion. Isn't that the way a retirement plan should work?

[west4567]

PERA is a defined benefit plan not a defined contribution plan-- the retirement payments by the covered public employee is not commensurate to what is paid in

Since it has always paid out, and not asked for a handout, and is far closer to solvency than most retirement programs, it is entirely commensurate with what has been paid in. Had PERA been a defined contribution plan all these years, it would have been able to pay out just as much, right up to (and probably right through) the last few months. PERA's problem is not one of cashflow, but rather one of long-term liability, calculated solely on today's depressed stock values.

[west4567]

nor is it [PERA] like most any other plan out there -- particularly Social Security

Most states have similar plans, but very few are run as well as PERA.

You're right, though, that PERA is drastically different from Social Security. SS uses current proceeds from working people to pay benefits to retirees. It's just a direct pass-through, and there's no investment making money for the participants during their working years.

SS has no interest-bearing assets, such as PERA's $30 billion, because the U.S. government spends any surplus and merely promises to repay it when needed. So, Social Security recipients make 2.5% return on their investment, and PERA employees make closer to 8% or 10%.

It's because the Social Security system really IS a ponzi scheme, but PERA is not.

[west4567]

I would love to be covered by such a plan---where my retirement is based on my highest average 3 years of income regardless of what I have paid in

Years-of-service is as important as the average salary amount. Work about 30 years in the system, your retirement amount is about 70% of your income.

Yes, you would love it, and I'd advocate such a retirement system for all of us. PERA is far more sound in principle and in practice than Social Security, and there's no hocus-pocus or taxpayer rip-offs involved - just long-term steady investing. The fact that Social Security is a rip-off for so many people doesn't mean that other retirement systems should lower themselves to that standard.

[west4567]

. . . the State kicks in twice as much as the employee . . .

The state pays nothing for my spouse's retirement. She pays about 8% and her employer pays 11%. This will, in most cases, lead to a comfortable, but not opulent, retirement. This is a good plan, pay-as-you-go, benefits in alignment with contributions, and a nice return on a very long-term investment.

Isn't this what Social Security should be doing?

[west4567]

. . . current problems are not just market but management by PERA who every year sought to maximize benefits . . .

The PERA board sought to hang on to reserves, but in 2002, their reserves got so large that the state in general and Governor Owens in particular INSISTED that PERA reduce them.

PERA was trying to plan for a rainy day, but was not allowed to. PERA thus established a "matching fund" 401K program that was a windfall for any participant, and dropped it as soon as the reserves were down to a reasonable amount. It was shortly thereafter that the some politicians were criticizing PERA for NOT having enough reserves (2006).

PERA responded to the 2006 problem by reducing benefits for new members - not by asking for the state to bail them out.

[west4567]

There are illegal PONZI schemes and there are legal PONZI schemes. The legal ones include PERA, social security, highly leveraged banks and corporations, etc.

To my knowledge, PERA has never asked for anyone to bail them out in its eighty years of operation. PERA does not depend on growth of its participant base, because payouts to a member have a correlation to deposits made by the participant.

In my wife's case, she'll get about 70% of her income upon retirement. Or, she could simply withdraw what she and her employer deposited on her behalf, plus nominal interest, and walk away with about half a mil.

70% ain't shabby. But she effectively saved a half million dollars over 30 years to get it. That ain't chicken feed either.

[west4567]

Again, my apologies for these numerous posts. It just seemed like the best way to respond to numerous points you all had made.
Thanks.

[Bob Nattering]

West4567,

Clarification on PERA and legal PONZI schemes:
I realize that it's a stretch to call PERA a legal PONZI scheme and very unfair to say it's equivalent to Social Security. Nonetheless, let's take an honest look at how this kind of retirement fund works. PERA is taking in contributions and paying benefits to a large group, varying from 21 years old with 0 years service to those already retired and not paying in. PERA uses an actuarial statistical model to average out contributions, years of service, years of retirement benefits and market returns on capital. The model probably assumes an average return on investments of about 7% (close to long-term market indexes) with some allowance for short-term market fluctuations. In the actuarial model, when a person retires you could actually calculate their "theoretical" capital value in the fund (i.e. their share of the capital based on their contributions and market returns).

So now we have an unusual event, such as the recent huge market downturn, which the model did allow for. PERA becomes underfunded. If everyone in the plan had already been retired, there would be no choice but to immediately cut benefits or exhaust all the capital before everyone in the program is deceased. Since everyone is not already retired they have another choice. Borrow from the "theoretical" capital of the younger investors, so that the folks already retired are not forced to take their share of the loss and hope to recover the program to full funding in a few years. This is where the system is at least "analogous" to a PONZI scheme. Whether they admit it or not, they are borrowing from the younger investors to avoid making the older investors take their share of the capital losses.

That said about PERA, essentially all Company retirement funds (what few are left) work the same way and always have. I think the major point here is that all of these systems are similar in that the models never allowed for a major downturn event like we have gone through. Everyone from the Government, to bankers to corporations us individuals simply underestimated risk. Now we all will be paying for that over the next few years.

One other thing about PERA: My wife is in the PERA system so I have a vested interest also. But, let's be honest and refer to PERA as a federal assisted retirement fund. How so? PERA employees are not required to pay social security taxes. Social Security is not an alternative retirement fund. Any capital SS has acquired in recent years from surpluses has been used to pay for the regular Federal budget. It will simply never be moved back to SS, because it has already been spent. The rest of SS tax is used to pay benefits to those retired now. Therefore, SS is just simply a tax and not a plan. There is nothing I would love better than to be relieved of SS tax and told that I would have to use the extra money for retirement investments. Simply put, PERA is to a great extent funded by selective tax relief. The rightness or wrongness of that is a completely different issue.

[large]

All three sides of the coin . . Used to contribute to PERA, actually twice . . But they wouldn't let me stay and invest (from the outside, rules y'kno) . . PERA is managed by questionable people with questionable agendas . . but that's something else. It's current woes are no more than any other retirement fund . . the Investment Business . . PERA, IRAs or 101(k)s (formerly 401(k)) are all in the tank . . and anyone who has retirement money socked away in the Money markets and other investment associated schemes that can say they're "sound" is either a liar or a wizard . . ****ed few wizards that I know of . .

Which leads me to the second side of the coin, Investment . . There are no guarantees that your money will be safe . . unless you're a genius in investments and follow these hourly, which makes you more or less a professional broker or such, you have to do pretty much what I and my wife do, trust someone else . . and that hasn't worked out all that well either . . back to the "Investments" conundrum . .

And then there's social security . . probably wouldn't have been regarded as a Ponzi scheme had (1) the 69th Congress not cleaned out the SSI Funds and left an IOU for the general taxpayer to pay . . and (2) had someone crunched the numbers and allowed for the Post WWII "Baby boom" . . . wherein a smaller number of payers (later) gets to pay for a big bunch of Payees later . . That's the Ponzi part . . My kid gets to pay any overage (and there's gonna be a big one) on my SS draw that I didn't pay. As a self employed person for over half my productive life, I paid the SS minimum each year . . and that doesn't add up to anywhere near the amount I will get in SS and Medicare benefits if I live to be 80+ . . Thus the SSI dilemma.

On the other hand we (the Wife and I) have invested a fair amount over the last 20 years and at one time it was a considerable sum . . 9/11/2001 and the current fiasco have left us just a little above solvent . . because no matter where the money was, it was subject to market forces, and while Warren Buffet and Bill Gates could afford to lose half their monetary value, most of us smaller investors got it in the shorts! And these "Recessions" or "Market Corrections' happen in cycles, usually about 10 years apart . . so if it take 10 years to get your investments valuation back to where it was before the bottom fell out the last time, why invest? I'm certainly not making any money off my money . . just watching it become a "Green Yo Yo" . . or as it is now, "Red" . .

I think the Idea that we can all retire, live on our investments in Tuscon or St. Petersburg is just a fairy tale, promoted by Brokers and Real Estate Tycoons . . And the idea that the Guv'mint will watch over our investments in any manner has got to be pure bullsh*t, look at the wunnerful job they've done up to now . .

So what's the solution? I sure as hell am not smart enough to figure it out . . fairly obvious, Hmmmm?

[west4567]

But, let's be honest and refer to PERA as a federal assisted retirement fund. How so? PERA employees are not required to pay social security taxes. Social Security is not an alternative retirement fund.

But PERA retirees don't receive benefits from Social Security either (unless they contributed). They are not involved in Social Security's problems. All PERA has done is built a strong, distinctly separate retirement system that is self-funded and provides much more reasonable benefits than SS.

PERA is successful; Social Security - not so much. PERA is not far from being fully funded, and will be making changes (without a bailout) to achieve that status. Social Security? I think we all agree that the pot of money that should be there is gone, and will never be returned.

Costs between the two systems are similar enough.

I know that no one is suggesting Social Security is anything other than a bad example; But all I'm doing is looking at a system that DOES work and saying, "Y'know - that's a pretty good model".

[loose cannon]

West,
My wife has worked part time for many years thru the various Colleges & Universities as an adjunct professor- she is a recognized expert in her field due to her Masters Degree and extensive job related expertise and training. She has accumulated a significant benefit towards retirement with just the limited amount of time she has put in over the years under PERA-- far more than her modest contribution would allow in any other venue. Our family has a vested interest in the PERA system as do many who have been critical of PERA -- we are critical as taxpayers I think because we have a mess with a system which is not truly self funded-
The point with social security that you seem to be missing is that it is a huge benefit to those who draw a salary under PERA that they do not have to pay SS taxes --this in effect means to all of us who do pay SS taxes on our earnings -- that we are subsidizing the PERA contribution that the public employee is making. I would much rather take what I would have to pay in SS taxes each year & kick it into PERA if I could bring my earned income in to qualify for a PERA pension -- PERA is a sweet deal or as you say "a good model" for the beneficiaries. The reason being is that the government agency in PERA and/or the State of Colorado kick in far more than do the employee and also in effect insulates much of the risk thru the good faith and credit of the government.

[west4567]

West,
The point with social security that you seem to be missing is that it is a huge benefit to those who draw a salary under PERA that they do not have to pay SS taxes . . .

They don't pay the taxes, but they don't derive any benefit. They don't affect social security either way - they're non-players. There is a huge benefit, but only because PERA contributions go into a good system, while SS goes into something of a rathole. This is why I'm advocating a PERA-like system for all.

PERA . . . is not truly self funded . . To my knowledge, it is and always has been 100% funded by the employee and the employer. Since those employers are all government entities, it's axiomatic that you are subsidizing PERA retirements, in the same sense as you are subdizing health insurance, medicare, life insurance, and Social Security for those government employees who pay it.
. . .PERA is a sweet deal or as you say "a good model" for the beneficiaries. The reason being is that the government agency in PERA and/or the State of Colorado kick in far more than do the employee . . .
In normal years, the employee pays 8% and the employer pays 10.15%;
Currently, schools are paying an additional 1.0% to get PERA back to "fully-funded" status.

As an aside, PERA has cut back on a number of benefits in the past few years as well, and the PERA braintrust will be asking the state assembly for permission to cut back even more benefits.

. . . and also in effect insulates much of the risk thru the good faith and credit of the government.
This is true. The state government would be on the hook to make good on PERA commitments should PERA ever not come through. But PERA's been around for 80 years, and this has never happened. Far more likely, IMHO, is that PERA employees who take little or nothing from the Social Security system, will be subsidizing Social Security employees through their income taxes in a few years.

[large]

Far more likely, IMHO, is that PERA employees who take little or nothing from the Social Security system, will be subsidizing Social Security employees through their income taxes in a few years.

You, and every taxpayer already are . . and have been since the 69th Congress cleaned out the SS fund and left an IOU, dunning the general fund . . That's why it's a Ponzi Scheme . . it might not have been 100% solvent in the end but had LBJ and his crew left those dollars alone SSI wouldn't be the current "Third Rail of Politics" that it has become . . Medicare might be but SSI sure as hell wouldn't . .

[west4567]

You, and every taxpayer already are . . and have been since the 69th Congress cleaned out the SS fund and left an IOU. . .

Really? I thought they had enough cashflow to cover the benefits, even if they had no assets. In any event, I would suspect we would all agree with you that raiding the assets was the problem.

It's a shame, too. I suspect that had the assets been left alone, SS recipients would get two or three times as much in retirement. It would be as good, maybe better, than PERA.

[large]

Nope, the 69th Congress cleaned out the fund, leaving nothing but an IOU and giving the debt to the general fund . . It's paid directly from tax revenues collected in the same year, I guess . .