Retirement insights from a Colorado PERA perspective

A distant view shows a mountainous landscape with sloping peaks, green trees in the foreground, and a cloudy sky above.

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.theatlantic.com/business/archive/2018/02/pensions-safety-net-california/553970/" target="_blank" rel="noreferrer noopener">This is what life without retirement savings looks like</a> |&nbsp;<a href="https://www.theatlantic.com" target="_blank" rel="noreferrer noopener">The Atlantic</a>Roberta Gordon never thought she’d still be alive at age 76. She definitely didn’t think she’d still be working. But every Saturday, she goes down to the local grocery store and hands out samples, earning $50 a day, because she needs the money. “I’m a working woman again,” she said in the common room of the senior apartment complex where she now lives, here in California’s Inland Empire. Gordon has worked dozens of odd jobs throughout her life—as a house cleaner, a home health aide, a telemarketer, a librarian, a fundraiser—but at many times in her life, she didn’t have a steady job that paid into Social Security. She didn’t receive a pension. And she definitely wasn’t making enough to put aside money for retirement.



<a href="https://www.marketwatch.com/story/a-new-idea-mandatory-retirement-accounts-to-help-workers-delay-claiming-social-security-2018-02-28" target="_blank" rel="noreferrer noopener">A new idea: Mandatory retirement accounts to help workers delay claiming Social Security</a> |<a href="https://www.marketwatch.com" target="_blank" rel="noreferrer noopener">MarketWatch</a>A new proposal would create retirement saving accounts that would enable people to postpone the age at which they claim Social Security, thereby increasing monthly benefits.



<a href="https://www.nytimes.com/2018/03/05/opinion/investor-class-pensions.html" target="_blank" rel="noreferrer noopener">The real reason the investor class hates pensions</a>|<a href="https://www.nytimes.com" target="_blank" rel="noreferrer noopener">The New York Times</a>No issue in America today better illustrates the divergent interests of working Americans and the 1 percent than pension reform. Substantial empirical evidence shows that the 401(k), recently renounced by its own investors, is grossly inadequate and will leave tens of millions of Americans with insufficient retirement assets. And yet states and cities are busy converting traditional pensions into these failing 401(k)s or equivalents, to the great benefit of money managers and the finance class. 401(k) holders let ourselves be charged high fees that we do not understand, we accept poor returns quarter after quarter, we never sue to enforce our rights, we never vote as shareholders and we never tell our investment managers how we think they ought to vote.



<a href="https://content.copera.org/retirement-roundup-what-retirement-looks-like-with-no-savings/" target="_blank" rel="noreferrer noopener">Kentucky pension bill illegal in at least 21 ways, Beshear tells lawmakers</a> |<a href="https://www.copera.org/retirement-roundup-social-security-retirement-age-going-up" target="_blank" rel="noreferrer noopener" class="broken_link">Lexington Herald-Leader</a> In February, Kentucky Attorney General Andy Beshear told state lawmakers that a proposal to overhaul Kentucky’s ailing public pension systems contains “multiple legal violations.” In a six-page legal opinion, Beshear outlined 21 ways he believes proposed legislation violates the “inviolable contract” the state has made with teachers and employees of state and local governments. “It is clear that if you pass [the bill] into law, you should expect numerous lawsuits, which the commonwealth will lose,” Beshear warned lawmakers.



<a href="http://www.governing.com/topics/workforce/gov-pension-reform-new-employees-retirement.html" target="_blank" rel="noreferrer noopener">Retirement experts to new government employees: Think for yourself</a> |<a href="http://www.governing.com" target="_blank" rel="noreferrer noopener">Governing</a>When politicians talk about pensions, it’s usually about the enormous weight they place on government budgets. According to the Volcker Alliance, state and local governments are on the hook for $1 trillion in unfunded pension liabilities. Lawmakers on both sides of the aisle push for pension “reform,” a word often used in a positive sense, to rescue dollars that could instead be used for other services. But what about future retirees? Is pension reform positive for them? In many cases, not so much.



<a href="https://www.copera.org/retirement-roundup-what-retirement-looks-like-with-no-savings" target="_blank" rel="noreferrer noopener" class="broken_link">31 weird things about retiring you probably didn&#8217;t know</a>&nbsp;|&nbsp;<a href="https://content.copera.org/retirement-roundup-what-retirement-looks-like-with-no-savings/" target="_blank" rel="noreferrer noopener">Nasdaq</a> It&#8217;s never too early to start thinking about how you want to spend your time — and your money — in retirement. No matter if you&#8217;re hoping to retire as early as possible or plan to work until you can&#8217;t, having a plan for how you want to spend your senior years helps make sure your dreams come true. Fortunately, there are some weird and interesting facts that could help you make the most out of retirement. Read and see how you can make retirement easy.

Retirement Roundup: What retirement looks like with no savings

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.plansponsor.com/cadillac-tax-delayed/" target="_blank" rel="noreferrer noopener">Cadillac Tax Delayed Again</a> |&nbsp;<a href="https://www.plansponsor.com" target="_blank" rel="noreferrer noopener">PLANSPONSOR</a>The congressional bill that ended the government shutdown and provided funding until February 8 also included another two-year delay in the Affordable Care Act’s (ACA) excise tax on high-cost health plans, known as the Cadillac tax. The Consolidated Appropriations Act, passed in 2016, included a two-year delay of the 40 percent excise tax, making it effective in 2020. The new bill pushes the effective date to 2022.



<a href="https://www.bloomberg.com/view/articles/2018-01-25/the-argument-for-ditching-the-401-k-and-starting-over" target="_blank" rel="noreferrer noopener" class="broken_link">The Argument for Ditching the 401(k) and Starting Over</a> |<a href="https://www.bloomberg.com/view/" target="_blank" rel="noreferrer noopener" class="broken_link">Bloomberg View</a>There have been some modest attempts in the past few years to shore up and fill in gaps in this country&#8217;s haphazard system of retirement savings. These attempts &#8212; federal myRA accounts, state-run retirement accounts, and fiduciary standards for retirement account providers &#8212; have also all been shut down, rolled back or delayed since Donald Trump moved into the White House a year ago. So it may seem like a curious time to talk about tossing aside the current system of 401(k)s and individual retirement accounts in favor of an entirely new retirement savings system, as Teresa Ghilarducci and Tony James do in their book, &#8220;Rescuing Retirement: A Plan to Guarantee Retirement Security for All Americans,&#8221; which after an earlier iteration in 2016 is now out in hardcover.



<a href="https://content.copera.org/retirement-roundup-another-delay-for-cadillac-tax/" target="_blank" rel="noreferrer noopener">Still no action yet on Kentucky pension reform</a> |<a href="http://www.themoreheadnews.com" target="_blank" rel="noreferrer noopener">The Morehead News</a>The 2018 Kentucky General Assembly is now one-third of the way toward its constitutionally limited 60 days to pass legislation — and still there is no pension bill in sight. Ask nearly any member of the General Assembly — Democrat or Republican, House member or senator — what they’ve heard about a possible pension bill and when it might be filed, and odds are that person will say he or she hasn’t heard anything. The holdup on pension reform — originally Gov. Matt Bevin and Republican legislative leaders hoped to pass a bill in special session last fall — is also delaying work on the two-year budget, Senate Minority Caucus Chair Dorsey Ridley said.



<a href="https://www.forbes.com/sites/robertlaura/2018/01/29/why-part-time-work-doesnt-always-work-in-retirement/#194ef5464180" target="_blank" rel="noreferrer noopener">Why Part Time Work Doesn&#8217;t Always Work In Retirement</a> |<a href="https://www.forbes.com" target="_blank" rel="noreferrer noopener">Forbes</a> The idea of working a few hours or days a week in retirement has become an increasingly popular planning tool because of the possibilities of using it to supplement retirement income, stay connected to the work world, and yet have the flexibility to play golf, enjoy the grand kids, and other retirement based activities. However, many people base their plans for working part-time in retirement on limited knowledge and experience or a short-term series of events that are unlikely to happen again.



<a href="https://www.bloomberg.com/view/articles/2018-01-22/retirement-risks-keep-rising-and-this-is-why" target="_blank" rel="noreferrer noopener" class="broken_link">Retirement Risks Keep Rising, and This Is Why</a> |<a href="https://www.bloomberg.com/view/" target="_blank" rel="noreferrer noopener" class="broken_link">Bloomberg View</a>Half of working-age households in the U.S. were on track in 2016 to be able to maintain their standard of living in retirement, according to the <a href="http://crr.bc.edu/special-projects/national-retirement-risk-index/" target="_blank" rel="noreferrer noopener">National Retirement Risk Index</a> report out this month from the Center for Retirement Research at Boston College. Thanks mainly to rising home values, that&#8217;s better than in 2010 or 2013. But it still means that half of working-age households aren&#8217;t prepared for retirement, up from just 30.4 percent in 1989.



<a href="https://www.fool.com/retirement/2018/01/29/guess-how-many-gen-xers-and-baby-boomers-have-no-r.aspx" target="_blank" rel="noreferrer noopener">Guess How Many Gen Xers and Baby Boomers Have No Retirement Savings</a>&nbsp;|&nbsp;<a href="https://www.fool.com" target="_blank" rel="noreferrer noopener">The Motley Fool</a> We&#8217;re all told time and time again how crucial it is to save for the future. But unfortunately, a large chunk of workers in their late 30s, 40s, 50s, and 60s continue to put their retirement at risk. In fact, 41 percent of Gen Xers and 42 percent of Baby Boomers have yet to start building their nest eggs, according to data compiled by Comet. And that&#8217;s obviously a lot scarier for the latter group, since they&#8217;re the ones with the least amount of time to play catch-up.

Retirement Roundup: Another delay for ‘Cadillac tax’

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.bizjournals.com/denver/news/2018/01/16/colorado-moves-up-on-best-states-to-retire-list.html" target="_blank" rel="noreferrer noopener">Colorado moves up on ‘best states to retire’ list</a>&nbsp;|&nbsp;<a href="https://www.bizjournals.com/denver/" target="_blank" rel="noreferrer noopener">Denver Business Journal</a>



In the past year, Colorado has moved up a few notches on an annual list of “best states to retire.” According to WalletHub, Colorado now ranks as the second-best state in the country to retire, behind only Florida. A year go, Colorado was ranked fifth. The criteria included affordability, quality of life, and health care.



<a href="https://www.plansponsor.com/close-retirement-still-feeling-unprepared/" target="_blank" rel="noreferrer noopener">Those close to and in retirement still feeling unprepared</a>&nbsp;|&nbsp;<a href="http://www.plansponsor.com" target="_blank" rel="noreferrer noopener">PlanSponsor</a>



The ninth biennial <a href="https://www.soa.org/research-reports/2018/retirement-risk-survey/">Risks and Process of Retirement Survey</a> from the Society of Actuaries (SOA) identified an overall increase in consumer concern for their finances both prior to and during retirement in 2017. A significant number of retirees and pre-retirees report that they feel unprepared to navigate financial shocks and unexpected expenses – 61 percent of pre-retirees and 47 percent of retirees feel unprepared for expenses in retirement that could deplete their assets.



<a href="https://www.fool.com/retirement/2018/01/13/what-raising-social-securitys-retirement-age-reall.aspx">What raising Social Security’s retirement age really means</a>&nbsp;|&nbsp;<a href="http://www.fool.com" target="_blank" rel="noreferrer noopener">The Motley Fool</a>



Social Security faces a long-term financial crisis. The demographic bump of baby boomers will continue to flow into the Social Security system for many years to come, and the outflow of Social Security benefits will not only use up all available payroll tax revenue but also eat into Social Security trust fund reserves, with projections suggesting a shortfall that leaves roughly a quarter of scheduled benefits unfunded. Many lawmakers see raising the full retirement age for Social Security benefits as a potential solution to the program’s financial woes. Yet, when lawmakers advocate for higher retirement ages without making similar changes to the age for collecting early benefits, the net impact is simply to cut monthly benefits to retirees.



<a href="http://squaredawayblog.bc.edu/squared-away/half-of-boomers-social-security-eligible/" target="_blank" rel="noreferrer noopener">Half of boomers Social Security eligible</a>&nbsp;|&nbsp;<a href="http://squaredawayblog.bc.edu/" target="_blank" rel="noreferrer noopener">Squared Away Blog</a>



About half of baby boomers are now over age 62 and can claim their Social Security benefits. The year 1955 was the midpoint for the post-World War II population explosion – and those boomers born in 1955 will turn 63 sometime this year.



<a href="https://www.courier-journal.com/story/news/politics/2018/01/17/kentucky-budget-missing-pension-reform-matt-bevin/1028338001/" target="_blank" rel="noreferrer noopener">Kentucky’s budget puzzle is missing a huge piece: pension reform</a>&nbsp;|&nbsp;<a href="http://www.courier-journal.com" target="_blank" rel="noreferrer noopener">Louisville Courier-Journal</a>



A major missing piece in Kentucky’s lean 2018-20 state budget proposed by its governor, Matt Bevin, is the impact of a pension reform bill that legislative leaders are secretly writing. While the reform plan is being finalized, the governor and Republican leaders in the Kentucky legislature have endorsed a new approach to funding pensions that would require $392 million more in annual funding for the Teachers’ Retirement System.



<a href="https://khn.org/news/for-elder-health-trips-to-the-er-are-often-a-tipping-point" target="_blank" rel="noreferrer noopener">For elder health, trips to the ER are often a tipping point</a>&nbsp;|&nbsp;<a href="http://www.khn.org" target="_blank" rel="noreferrer noopener">Kaiser Health News</a>



An older person’s trip to the ER often signals a serious health challenge and should serve as a wake-up call for caregivers and relatives. Illnesses or injuries that lead to ER visits can initiate a fairly vulnerable period of time for older persons, and risks increase for seniors to acquire a disability within six months of an ER visit.

Retirement Roundup: Colorado a top retirement state

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.marketwatch.com/story/this-is-why-you-shouldnt-count-on-social-security-2017-10-27" target="_blank" rel="noreferrer noopener">This is why you shouldn’t count on Social Security |</a>&nbsp;<a href="http://www.marketwatch.com" target="_blank" rel="noreferrer noopener">MarketWatch</a>The Social Security system is expected to be exhausted by the early 2030s, experts say. Americans are still paying into the system every paycheck. What will happen, however, will be a cut to the benefits Americans receive. The government has noticed. The Social Security Administration put out a note last year saying Social Security and Medicare are both facing long-term shortfalls under the current structure, and that they together accounted for 42 percent of federal program expenditures in the fiscal year of 2016. In its 82 years, Social Security alone has collected almost $20 trillion — and it’s already paid out $17.1 trillion, leaving about $2.8 trillion in its two accounts (the Old-Age and Survivors Insurance Trust Fund and the Disability Insurance Trust Fund) at the end of last year. The government expects the accounts to steadily decline until they are depleted in 2034. Last December, the House Ways and Means Social Security Subcommittee Chairman proposed a 31 percent cut in benefits as one way to relieve this over-exhaustion.



<a href="https://www.cnbc.com/2017/10/27/what-the-battle-over-401k-plans-means-for-your-retirement.html" target="_blank" rel="noreferrer noopener">What the battle over 401(k) plans means for your retirement</a> |&nbsp;<a href="https://www.cnbc.com" target="_blank" rel="noreferrer noopener">CNBC</a>Any changes to taxes on your 401(k) savings won&#8217;t change two key tenets of planning for retirement: Save early and save as much as possible. That&#8217;s according to retirement experts even as 401(k) plans have gotten drawn into the tax-reform debate in Washington. Right now, workers who have access to 401(k) plans will be able to invest up to $18,500 next year, while participants age 50 and over will be able to put away $6,000 more. Under current rules, investors will not pay taxes on those contributions until a later date. That could all change if some lawmakers have their way. Limits for pretax contributions to 401(k) plans could be lowered to $2,400 as Congress looks to make up for other tax cuts.



<a href="https://www.copera.org/retirement-roundup-dont-count-on-social-security" target="_blank" rel="noreferrer noopener" class="broken_link">Op-Ed: There’s a better solution on pensions |</a>&nbsp;<a href="https://content.copera.org/retirement-roundup-dont-count-on-social-security/" target="_blank" rel="noreferrer noopener">Lexington Herald-Leader</a>Proposed pension reforms in Kentucky leave in place the huge unfunded liability of anywhere from $33 billion to $84 billion. The General Assembly and local governments will have to find about $1 billion and $400 million, respectively, of additional revenue (taxes) or spending cuts each year, causing additional strains on Kentucky’s beleaguered public institutions and services. The impoverished state, full of talented and industrious citizens, will only be further impoverished. When the next downturn in the economy occurs, Kentucky’s bond ratings will be further reduced.



<a href="https://www.forbes.com/sites/robertlaura/2017/10/30/the-difference-between-retirement-and-successful-aging/#60711556b239" target="_blank" rel="noreferrer noopener">The Difference Between Retirement and Successful Aging |</a>&nbsp;<a href="http://www.forbes.com" target="_blank" rel="noreferrer noopener">Forbes</a> While retirement may provide more time to work out and prepare healthier meals, it doesn’t come with any special fairy dust that suddenly provides extra motivation, desire, or discipline. In fact, retirement tends to magnify the existing behaviors and habits of people, not change them. Therefore, retirement doesn’t foster or lead to successful aging; it can actually work against it.



<a href="https://www.plansponsor.com/americans-greatest-fear-aging-covering-ltc-costs/" target="_blank" rel="noreferrer noopener">Americans’ Greatest Fear About Aging is Covering Long Term Care Costs |</a>&nbsp;<a href="https://www.plansponsor.com/" target="_blank" rel="noreferrer noopener">PLANSPONSOR</a>Not having enough money to pay for health care or long-term care is the greatest fear adults have about aging, Genworth found in a survey of 1,200 people. Despite these overwhelming apprehensions, only 20 percent of Americans have taken any steps towards figuring out how to finance or actually financing long-term care costs. In addition, only 50 percent feel they should be responsible for their own care as they age, with the remainder feeling it is the responsibility of the government, their family or community or faith-based organizations.



<a href="https://www.copera.org/retirement-roundup-dont-count-on-social-security" target="_blank" rel="noreferrer noopener" class="broken_link">Ted Benna, father of the 401(k), thinks tax reform that favors Roth plans is ‘pretty stupid’</a>&nbsp;|&nbsp;<a href="https://content.copera.org/retirement-roundup-dont-count-on-social-security/" target="_blank" rel="noreferrer noopener">Pensions &amp; Investments</a> Ted Benna was a pioneer of the 401(k) plan, having developed the concept of pre-tax 401(k) deferrals. He adopted the first-ever 401(k) savings plan in 1981 for the Johnson Cos., where he worked as a retirement benefit consultant. Now, debate is swirling on Capitol Hill to reduce the pre-tax contribution limit from the current $18,000 annual limit as part of a Republican tax reform package set to be unveiled this week. Any contributions beyond the pre-tax limit would be mandated to go to Roth, or after-tax, accounts, a policy known as “Rothification.”



“I think it&#8217;s pretty stupid in terms of retirement policy,” Mr. Benna, now a consultant at an eponymous firm, told <a href="http://www.investmentnews.com/" target="_blank" rel="noreferrer noopener">InvestmentNews</a>. “There&#8217;s major concern about a retirement crisis that&#8217;s staring us in the face. (The 401(k) plan) is the plan, whether people like it or hate it, that&#8217;s the primary way for the average American to be saving for retirement.”

Retirement Roundup: Don’t Count on Social Security

A digest of timely information and insight about finance, investing, and retirement.



<a href="https://www.washingtonpost.com/graphics/2017/national/seniors-financial-insecurity/?utm_term=.cca7f14421behttps://www.yahoo.com/news/apos-long-1-million-retirement-195553143.html" target="_blank" rel="noreferrer noopener" class="broken_link">“I’m going to work until I die:” The new reality of old age in America</a>&nbsp;|&nbsp;<a href="https://www.washingtonpost.com" target="_blank" rel="noreferrer noopener" class="broken_link">Washington Post </a>People are living longer, more expensive lives, often without much of a safety net. As a result, record numbers of Americans older than 65 are working — now nearly 1 in 5. That proportion has risen steadily over the past decade, and at a far faster rate than any other age group. Today, 9 million senior citizens work, compared with 4 million in 2000.



<a href="https://www.bloomberg.com/news/articles/2017-09-25/having-children-can-ruin-your-retirement" target="_blank" rel="noreferrer noopener" class="broken_link">Having Children Can Ruin Your Retirement |</a>&nbsp;<a href="https://www.bloomberg.com/news/articles/2017-08-24/health-care-costs-could-eat-up-retirement-funds-forecast-shows" target="_blank" rel="noreferrer noopener" class="broken_link">Bloomberg </a>Parenthood has plenty of non-monetary perks, but the financial effects can last the rest of your life. It may seem obvious that kids make it harder to save. In practice, however, parents can compensate for the extra costs of parenting by spending less on themselves. Parents are often forced to budget carefully—a skill that will pay off long after their children are grown. Some people may even decide to take their careers more seriously after having kids, and studies show that some fathers end up earning more than if they’d remained childless.



<a href="https://www.copera.org/retirement-roundup-older-workers-new-problems" target="_blank" rel="noreferrer noopener" class="broken_link">Colorado spends the most on out-of-pocket health care but that could be a good sign |</a>&nbsp;<a href="http://www.denverpost.com" target="_blank" rel="noreferrer noopener">Denver Post</a> Colorado spends the most on out-of-pocket health care costs, according to a JPMorgan Chase Institute healthcare spending study. But that’s not necessarily a bad sign. The study, examining anonymous data from 2.3 million Chase customers across 23 states from 2013-16, found that families increased their health care spending when they came into more income or assets.



<a href="https://www.forbes.com/sites/nextavenue/2017/09/13/why-the-tax-reform-crew-may-target-your-retirement/#740796a4194e" target="_blank" rel="noreferrer noopener">Why The Tax Reform Crew May Target Your Retirement |</a>&nbsp;<a href="https://www.forbes.com" target="_blank" rel="noreferrer noopener">Forbes </a>It’s&nbsp;<a href="http://www.nirsonline.org/index.php?option=com_content&amp;task=view&amp;id=882&amp;Itemid=48" target="_blank" rel="noreferrer noopener">no secret</a>&nbsp;that the trend to 401(k) plans from traditional pensions has put more pressure on individuals to save enough for retirement. Combine that with recent moves by the federal government to roll back rules that might have made saving easier, and the retirement landscape has never been more treacherous. Fortunately, there are still some common-sense steps you can take to make your financial future more secure.



<a href="https://www.bloomberg.com/news/articles/2017-09-29/who-s-left-out-of-401-k-nation" target="_blank" rel="noreferrer noopener" class="broken_link">Who’s Left Out of 401(k) Nation |</a>&nbsp;<a href="https://www.bloomberg.com/news/articles/2017-08-24/health-care-costs-could-eat-up-retirement-funds-forecast-shows" target="_blank" rel="noreferrer noopener" class="broken_link">Bloomberg </a>Only 45 percent of U.S. workers participate in an employer-sponsored retirement plan, according to the Pew Charitable Trusts. Many don’t even have the option—one-third of U.S. workers aren’t offered a pension or 401(k)-style plan by their employers.



<a href="https://www.copera.org/retirement-roundup-older-workers-new-problems" target="_blank" rel="noreferrer noopener" class="broken_link">Proposed 401(k)s cost more than Kentucky’s existing defined benefit pension plans</a>&nbsp;|&nbsp;<a href="http://www.nkytribune.com" target="_blank" rel="noreferrer noopener">Northern Kentucky Tribune</a> Kentucky needs ideas that work to reduce its unfunded pension liabilities. Moving employees into 401(k)-type defined contribution plans is actually more expensive, increases the cost of paying off existing liabilities, and harms retirees, while making it much more difficult to attract and retain a skilled workforce.

Retirement Roundup: Older Workers, New Problems

In recent months, a handful of states have made big changes to their public retirement plans. The latest spate of pension reform is part of a broader trend among retirement plans following the financial crisis of 2008. The <a href="http://crr.bc.edu/briefs/state-and-local-pension-reform-since-the-financial-crisis/" target="_blank" rel="noreferrer noopener">Center for Retirement Research</a> at Boston College <a href="http://crr.bc.edu/wp-content/uploads/2016/12/slp_54.pdf" target="_blank" rel="noreferrer noopener">looked at</a> reforms made at over 200 major state and local retirement plan between 2009 and 2014 and found that since the financial crisis, 74 percent of state plans and 57 percent of large local plans have cut benefits or raised employee contributions to curb rising costs.



A few states that have recently been in the news for their actions to address pension debt are reviewed below. Notably, most of these states have shifted the risk of future retiree benefits away from employers and onto public workers by designing plans that have more in common with a 401(k) than with traditional defined benefit plans. Despite dramatic changes in plan design, these states still struggle with how to pay off the existing unfunded liabilities. Further, the move away from defined benefit plan designs may exacerbate the problem rather than helping to solve it.



Michigan



In Michigan, <a href="http://www.michigan.gov/documents/orsschools/R3514C_SummaryofPA92of2017_578496_7.pdf" target="_blank" rel="noreferrer noopener">legislation</a> passed and signed by the governor in July is intended to increase incentives for teachers to join a defined contribution or a 401(k) type plan. The new law calls for the replacement of an existing hybrid retirement plan with a new hybrid option. The legislation does not change the pension or health care benefits for current retirees or employees who were hired before July 1, 2010; nor does it address the $29 billion unfunded liability of the older defined benefit plan.



<a href="http://www.freep.com/story/opinion/contributors/2017/07/14/michigan-pension-reform/476382001/" target="_blank" rel="noreferrer noopener">Proponents of the legislation argue</a> that it gives schools more predictable and contained pension costs.



Opponents, however, <a href="https://www.ai-cio.com/news/michigan-gop-reaches-deal-teacher-pensions/" target="_blank" rel="noreferrer noopener">fear</a> that the <a href="https://content.copera.org/state-pension-reform-mixed-results/" target="_blank" rel="noreferrer noopener">changes will cost taxpayers </a>and lead to the closure of any hybrid retirement option, leaving teachers and other school employees with only a 401(k)-type plan. (If the new hybrid plan drops to a funding ratio of 85 percent or lower over two years, it will be closed to new members.) They also fear that it will make it <a href="http://www.mlive.com/news/index.ssf/2017/07/will_changes_to_michigans_pens.html" target="_blank" rel="noreferrer noopener">more difficult to recruit new teachers</a> and discourage existing teachers to remain in the profession long-term.



The final bill was a compromise from an <a href="http://www.mlive.com/news/index.ssf/2017/05/reforms_to_michigans_teacher_p.html" target="_blank" rel="noreferrer noopener">earlier legislative proposal</a> that would have closed the hybrid plan entirely to new hires and placed all teachers in 401(k)-style plans. That proposal was projected to cost <a href="http://www.detroitnews.com/story/news/politics/2017/05/22/michigan-pension/101997024/" target="_blank" rel="noreferrer noopener">$16 million in additional costs for 2018 and grow to as much as $813 million per year by 2048</a>.



Moving school employees into a new hybrid plan does not pay down the debt of the legacy pension system that went from being <a href="http://www.detroitnews.com/story/news/politics/2017/05/22/michigan-pension/101997024/" target="_blank" rel="noreferrer noopener">fully funded in 1996 to a $29 billion deficit in 2017</a>.



Pennsylvania



Pennsylvania legislators also <a href="http://www.post-gazette.com/news/state/2017/06/12/pennsylvania-pension-reform-401-k-state-contribution-tom-wolf-legislation/stories/201706120171" target="_blank" rel="noreferrer noopener">passed pension reform legislation this summer</a> that closes the existing defined benefit retirement plan to all school employees and most state workers beginning in 2019. Future workers will select from one of three plans that offer either a combination of some guaranteed benefit and a 401(k)-style option or a 401(k)-type option only. Current members of the retirement plan will have the choice to stay put or switch into one of the new plans, but once a choice has been made, <a href="http://www.pennlive.com/politics/index.ssf/2017/06/gov_tom_wolf_signs_pas_pension.html" target="_blank" rel="noreferrer noopener">it is final</a>. Retirees will not see a change to their benefits under this new law.



Supporters of the legislation <a href="http://www.delcotimes.com/opinion/20170625/guest-column-pa-takes-giant-step-in-fixing-public-pension-crisis" target="_blank" rel="noreferrer noopener">argued</a> that the new retirement plan options reduce the burden on taxpayers who are on the hook for public-sector retirement benefits regardless of market performance and would avoid increases in contributions that schools and state government now face. It could also <a href="https://content.copera.org/state-pension-reform-mixed-results/" target="_blank" rel="noreferrer noopener">reduce fees paid to Wall Street and potentially save $10 billion</a>, said Gov. Tom Wolf, who signed the bill into law on June 12, 2017.



The changes are not without critics, however, who argue that the transition to new retirement options <a href="http://www.pennlive.com/politics/index.ssf/2017/06/gov_tom_wolf_signs_pas_pension.html" target="_blank" rel="noreferrer noopener">does little to address the root cause of the pension crisis</a>, which is the combined $70 billion unfunded liability of the state’s retirement plans for state employees and public schools.



Kentucky



In 2013, Kentucky lawmakers approved a <a href="https://www.copera.org/state-pension-reform-mixed-results" target="_blank" rel="noreferrer noopener" class="broken_link">pension reform plan</a> that moved newly hired state workers to a 401(k)-style hybrid plan, generated an extra $100 million for the state pension system, and committed the state to making full recommended pension contributions every year.



After that plan was approved, a bipartisan group of Kentucky state legislators <a href="http://www.huffingtonpost.com/2013/09/24/pew-trusts-pensions_n_3983654.html" target="_blank" rel="noreferrer noopener">wrote</a> of their fears that the new 401(k)-style hybrid plan would harm, rather than help, current and future workers by reducing benefits and increasing costs.



Since 2013, the unfunded liabilities of the pension system have continued to grow, <a href="https://www.copera.org/state-pension-reform-mixed-results" target="_blank" rel="noreferrer noopener" class="broken_link">totaling $33 billion at the end of June, 2017 – up $26 billion from about a decade earlier</a>. Growth in the unfunded liability is attributed to everything from weak financial markets and plan performance to increases in cost of living adjustments and employer contributions below actuarially required levels, a “<a href="https://www.ai-cio.com/news/kentucky-pensions-face-insolvency-five-years/" target="_blank" rel="noreferrer noopener">pattern of underfunding the system…from fiscal year 2004 to fiscal year 2014” that could leave the retirement system facing insolvency in just five years</a>.



<a href="http://www.courier-journal.com/story/news/politics/2017/07/14/can-public-pension-benefits-cut-kentucky-officials-looking-into/434944001/" target="_blank" rel="noreferrer noopener">Kentucky Gov. Matt Bevin is preparing to call a special session</a> to stabilize the state’s pension crisis, but has not yet released specific proposals for pension reforms or <a href="http://www.courier-journal.com/story/news/politics/2017/06/06/gov-matt-bevin-says-no-special-session-before-aug-15/375532001/" target="_blank" rel="noreferrer noopener">set a date for the special session</a>.



Illinois



A pension reform plan for Chicago’s municipal and labor pensions <a href="https://www.copera.org/state-pension-reform-mixed-results" target="_blank" rel="noreferrer noopener" class="broken_link">was included in the Illinois state budget that was approved in July. The approved budget also included</a> a hybrid plan for some new employees in the state pension system. Increased contributions from some employees and increased city contributions that were included in the measure are intended to improve the <a href="http://www.meabf.org/" target="_blank" rel="noreferrer noopener">Chicago Municipal Employees retirement plan</a> and the <a href="http://www.labfchicago.org/" target="_blank" rel="noreferrer noopener">Chicago Laborers&#8217; Annuity and Benefit fund</a> funding ratios to 90 percent each by 2058.



Chicago is required to make contributions on an actuarial basis to both funds beginning in 2023. Participants hired after January 1, 2017, will face higher contribution rates but full eligibility for a benefit lowered to age 65 from 67. Those hired before 2017, but on or after January 1, 2011, will have the option to increase their contribution rate in exchange for lowering their retirement age to 65, while those hired before 2011 are not affected.



The pension changes for new hires at the Illinois Teachers Retirement System, the Illinois State Employees’ Retirement System, and the Illinois State Universities Retirement System include a hybrid retirement plan for new hires. The changes are not expected to dramatically reduce the state’s unfunded pension liabilities.



Lessons learned



The experiences of these public retirement plans might help to inform policymakers and stakeholders in Colorado who are working to ensure that public employees have a reliable and sustainable retirement plan, or at least provide a cautionary tale. Certainly considering how different plan designs treat risk and which parties bear risk is a critical part of the equation. Any changes will likely impact current, future, and retired public employees and should be a part of any discussion. In addition, any future changes should be evaluated in terms of how they address the current unfunded liability. As experienced by several states, efforts to shift risk and ignore the unfunded liabilities mean the plan is worse after reforms than before they were implemented.



In 2015, an independent, third-party <a href="https://www.copera.org/state-pension-reform-mixed-results" target="_blank" rel="noreferrer noopener" class="broken_link">analysis</a> commissioned by the Colorado General Assembly and performed by GRS considered the cost and effectiveness of the PERA hybrid plan design compared to other types of retirement plans. PERA on the Issues readers may be familiar with this study that found the PERA plan design delivers the <a href="https://peraontheissues.com/wp-content/uploads/2016/08/Infographic-Studies-1.pdf" target="_blank" rel="noreferrer noopener">most benefit at the lowest cost</a>. The GRS study also included information related to the cost associated with switching from the current hybrid defined benefit plan design to a cash balance-type plan. The “transition cost” of moving new hires to this type of plan structure over time would total between $9 billion and $16 billion.

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