My View: We can’t fix PERS until we agree on its goal

Tuesday, May 21, 2019

In the discussion about state public pension reform, a basic question has been left unasked and unanswered: What is the purpose of the Oregon Public Employees Retirement System?

Per its website, “The Oregon Public Employees Retirement System (PERS) serves the people of Oregon by administering public employee benefit trusts to pay the right benefit, to the right person, at the right time.”

That is a wonderful qualitative goal. But in terms of public policy, what’s really needed is a quantitative goal.

Think about your first instinct when your car’s engine warning light comes on. Your goal, of course, is for the car to get you to “the right place, at the right time, and at a reasonable cost.”

But do you habitually ignore warning lights and proceed anyway? Do you ditch your car on the side of the road? Probably neither. Instead, you identify obvious issues and work to make sure your goal remains within reach.

If your car comes into the garage with a flat tire and your mechanic immediately starts replacing the engine, you should get a new mechanic. If your mechanic points out that 75% of your tires are working fine and there’s no problem otherwise, you should also get a new mechanic.

PERS is similar. To that end, PERS is sorely in need of a tune-up.

PERS’s long-stated retirement goal is for a person with 30 years of service to achieve 50% of their final average salary as a pension. That is added to Social Security, plus whatever a person has personally set aside (either through an IRA or other savings) — in effect, a three-legged retirement stool. Part of the reason for the challenges PERS faces today is that in the past, the 50% goal for 30 years of government service was exceeded — in some cases, quite dramatically. Just think of former University of Oregon football coach Mike Bellotti receiving $46,000 a month in PERS retirement benefits.

State officials attempted to address that problem in 2003 with the creation of “Tier 3” employees. The result is a combined defined-benefit and defined-contribution retirement plan.

A standard employee beginning work today and working 30 years will receive upon retirement a defined benefit of 1.5% of their final average salary for each year of employment — or 45% of final average salary. The defined-contribution portion comes from what is called the Individual Account Program (IAP), in which 6% of a participant’s income (contributed either by the employee or employer) is allocated to their PERS retirement account.

If you look at actual rates of return on IAP dollars and assume future growth slightly less than the system’s projected earnings rate of 7.2%, it appears the defined-contribution program will generate at least 16% of final average salary for a person whose wages grow at 3.5% a year and who retires after 30 years at age 65.

So, a 45% defined benefit (PERS) plus a 16% defined contribution (IAP) equals 61% — far exceeding the 50% goal before Social Security and other savings.

Yet “PERS by the Numbers” and other information on the PERS website does not appear to provide that information.

Understandably, the PERS team is reluctant to present a specific retirement goal for new employees, given the vagaries of investment returns. It is easier to provide the goal for just a defined-benefit program; presenting an explicit goal for the entire program or to even state a target/goal might create legal challenges.

Nevertheless, that raises crucial questions: Is the goal still 50% for somebody beginning work today and working 30 years? What are the assumptions behind the goal? How soon can this information be generated and brought to state government and the public for debate and solutions?

Just as a diagnostic for your car is needed before work is done, the same is needed for PERS. If the goal is 50% of final average salary and it is more than being achieved, then action needs to be taken. If the goal of 50% is not being achieved, then that requires a different set of actions.

PERS isn’t a black-and-white issue. Our public employees deserve a retirement system they can count on, and contributions into that system are part of what we as taxpayers need to pay if we want quality services.However, that needs to be done prudently, and we have a responsibility — taxpayers and beneficiaries — to work toward PERS sustainability.

Today, PERS is eating away at state, county, city and school budgets. If our goal is “to pay the right benefit, to the right person, at the right time,” then we must do more than merely rearrange our prejudices. Otherwise, we’re ignoring the warning lights and facing what are sure to be increasingly expensive repair costs.

Jeff Gudman served on the Lake Oswego City Council from 2011-2018 and was the Republican Party’s 2016 candidate for state treasurer. He can be reached at JGudman7150@msn.com.