Editor’s note: This is a weekly Q&A focused on the Oregon Public Employees Retirement System. Got a question? Submit it to email@example.com.
Q: Do PERS members contribute to their own retirement?
A: Yes. Since the inception of PERS in 1946, the state has required a mandatory retirement contribution from employees, now 6 percent of PERS-covered salary. In some cases, employers “pick up” this cost for employees, a money-saving concession that was negotiated four decades ago in lieu of wage increases and then became a standard part of collective bargaining agreements.
There is a good deal of confusion around employee contributions because, since Jan. 1, 2004, they no longer support the pension fund. Instead, they are deposited in a supplementary account that is invested alongside the pension fund assets. Those accounts belong to employees and earn market returns, similar to a 401(k). When retiring, members can take their individual account balance as a lump-sum payment, in equal installments over five, 10, 15, or 20 years, or over their expected lifetime.
All PERS members still receive a defined benefit pension as well. Since the 2004 changes, however, employees make no contribution to that fund.
The state redirected those contributions to individual accounts in order to put a stop to the hyper-inflated benefits that were being generated under the system’s money match formula. That formula required the state to double employees’ pension account balances (their contributions plus earnings) upon retirement, then convert that sum to a monthly annuity calculated using an interest rate that is far more generous than available in private sector annuities.
The money match is at the heart of PERS current funding troubles. During the two-decade bull market of the ’80s and ’90s, a PERS Board dominated by public employees credited employee pension accounts with almost all of the system’s earnings. Under the money match, those inflated accounts translated to a large, generational cohort of retirees with far more generous benefits than lawmakers originally intended or employers had funded. When financial markets came back to earth, PERS was left with a major funding hole.
As part of 2003 pension reforms, legislators took the rocket fuel out of the money match by redirecting employee contributions into individual investment accounts, where employee contributions and earnings are not matched.
The employee contribution is still at the center of the Legislature’s ongoing debate over pension reform, however. Oregon’s is the only state pension system in the country that requires no contribution from employees. Some lawmakers and business groups would like to see some or all employee contributions redirected to support the pension fund again – a move that could save employers money. That proposal was floated in 2017 as part of negotiations over a tax increase, but the deal died.
Public employees reject this proposal on principle, correctly noting that it would cut their total compensation. But it may come up again in 2019 as lawmakers debate new tax proposals.
One final note on employee contributions. Under Gov. Kate Brown, the state has negotiated new agreements with two of the biggest public employee unions that end the 6 percent pickup and have employees make their own contributions to their individual accounts. In exchange, the state gave those employees a 6.95 percent raise, with the extra 0.95 percent to compensate for associated payroll taxes. The deal was premised on leaving net employee pay unchanged, as well as the net cost to the state.
Brown says she was looking to clear up any confusion over who was actually paying employees’ retirement contributions. But the deal will cost employers in the long run, as increased wages, compounded over employees’ careers, will also play out in higher overtime and differential pay, and higher final salaries used in pension calculations, thus higher pension benefits.
The move does nothing to help offset PERS $22 billion unfunded liability.