A bad investment year at a precarious time for Colorado’s public workers’ pension will mean more sacrifices than state lawmakers expected when they approved a sweeping deal to stabilize the retirement system’s finances in 2018.
The good news: Unlike the legislature’s prior attempts to fix the Public Employees’ Retirement Association’s funding woes, safeguards are kicking in automatically to prevent the pension from digging a bigger financial hole.
The bad news: Those safeguards mean more money out of the pockets of public sector retirees, workers and the taxpayer-funded government agencies that employ them.
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How the state pension got here
Just 20 years ago, Colorado’s public pension had more than 100% of the money it needed to pay retirement benefits in perpetuity.
Today, it’s only 59.8% funded, with $31 billion in unfunded benefits owed.
So what happened? On the investment side, the booming stock market of the 1990s ended with a whimper. And the 2000s brought the dot-com bubble, 9/11, the housing crash, persistent low inflation, and, now, a tariff war that economists say is acting as a drag on an otherwise stellar economy.
Over the long-term, PERA needs its investments to grow by 7.25% annually to hit its financial targets. But while it’s achieved 8.8% investment growth over the last decade, that hasn’t been enough to overcome the last two recessions. Over the last 20 years, the pension has averaged only 6.2% returns.
But investments are only part of the story. There are a number of factors to blame, but Colorado’s government effectively spent the last 20 years promising retirement benefits without paying for them.
- In the early 2000s, the state legislature and then-Gov. Bill Owens, a Republican, sweetened PERA’s benefit package without adjusting contributions to cover the cost.
- When lawmakers passed Senate Bill 1, the 2010 reform effort designed to recover from the financial crisis, changes were phased in slowly, which allowed PERA to dig a bigger financial hole in the meantime.
- After 2010, the PERA board repeatedly adopted more conservative financial assumptions to account for lower market returns and the longer lifespans of retirees. But the legislature didn’t increase contributions or cut benefits to match.
- In all, the government alone underfunded the system by more than $5 billion since 2001, allowing its IOU to retirees to grow. That put the system at heightened risk when the markets took a bad turn.
Senate Bill 200 was designed to avoid the mistakes of the past. Contributions ramped up faster, and a safeguard was written into the law that would automatically cut benefits and increase contributions as necessary to keep PERA on a 30-year path to 100% funding.
Unfortunately for Coloradans, that safeguard kicked in the very first year. PERA had its worst investment returns since 2008, losing $1.8 billion thanks to an awful December for the stock market. More people also retired last year than expected, causing a further blow to the pension’s balance sheet.
Costs keep rising — but it’s not because of today’s workers
Pensions across the country rely on two things to pay benefits: investment earnings and contributions from government agencies and their employees.
In a properly funded pension, each worker puts in a certain percentage of their paycheck, the government chips in a little more and the money grows over the course of the worker’s life. The resulting nest egg is supposed to be large enough to pay out their monthly pension checks until they die.
But Colorado’s pension is not properly funded. And playing catch-up is becoming increasingly expensive.
Under Senate Bill 200, most workers will be contributing 10.5% of each paycheck to the pension by 2021. Their employer, whether it’s the state or a school district, will contribute nearly double that — but the majority of it won’t fund the retirement of today’s worker. Instead, most of the money is needed to pay off unfunded debts owed to prior generations.
Retirees are getting less
Compared to the huge numbers that employees and taxpayers are shelling out, the cost of living cuts to retirees may not sound like much.
But over the course of decades, small cuts each year can add up. And PERA members don’t contribute into or receive Social Security, leaving them without a federal safety net in retirement.
Under Senate Bill 200, annual cost of living raises were suspended for two years, then cut to 1.5% from 2%. Because of the new auto-adjust provision, it will fall even further to 1.25% annually, meaning retirees will likely lose money over time to inflation. The cost of living in the Denver-Aurora-Lakewood area rose by 2.8% in 2018 and 3.4% in 2017.
For the typical state government worker that retired in 2018 with a starting benefit of $33,540 a year, that’s a $120,000 loss over a 25-year retirement. A new public school retiree making a $27,492 annual pension stands to lose $98,000 from the 2018 reforms.
Where the discussions go next
Lawmakers and PERA officials say they’re concerned about the impact the changes are having on retirees and today’s public workforce.
But with policymakers on both sides of the aisle advocating for patience while the reforms take hold, don’t expect further legislative changes in the near future, barring a dramatic change in the pension’s financial fortunes.