You Should Care Whether Mississippi Reduces the PERS 8% Investement Return Assumption
I recently wrote about the Mississippi's Public Employees Retirement System (PERS). My point was that the 8% investment return assumption in the system is not realistic. Monday's Wall Street Journal contained an article that stated that other states with an 8% assumption are considering reducing the assumption.
The WSJ article states:
Turmoil in Europe, the sluggish economy and low interest rates are intensifying pressure on public pension-fund systems to reduce the annual-performance assumptions they use to determine contributions from taxpayers and employees.
Some lawmakers and pension officials are pushing to abandon the roughly 8% annual-return assumption set by many public-employee funds, saying the rate is unrealistically high given upheaval in markets around the world and the preceding financial crisis.
Some state and local pension plans have already reduced their assumptions:
Since the financial crisis, at least 19 state and local pension plans have cut their return targets, while more than 100 others have held rates steady, according to a survey of large funds by the National Association of State Retirement Administrators.
And yes, lowering the assumption could jeopardize the “13th check” that represents a cost-of-living adjustment:
In Minnesota, legislators last year reduced cost-of-living adjustments for retired public workers until the funding level of the pension system improves. Lowering the rate of return could lower the pension system's funding level and potentially delay when the cost-of-living adjustments are restored. Some state lawmakers say lowering the rate will benefit the system over the long haul. "A new day has dawned," said Morrie Lanning, chairman of the Legislative Commission on Pensions and Retirement in Minnesota, who wants to lower the return target. "It may have made sense in the past, but it's not realistic anymore."
Meanwhile, Cottonmouth suggests that there is a Republican attack on PERS to shift the management of state pensions to private hands.
My Take:
I'm not saying that Cottonmouth is wrong that there is a Republican agenda to shift management to private companies. I'm not saying he's right either. I don't know one way or the other.
But there is trouble on the horizon if the 8% investment return assumption is not lowered and the fallout dealt with. And taxpayers will be the ones left holding the bag, as stated in this comment to the WSJ article:
What risk does the public employee have? Practically none. The taxpayers absorb nearly 100% of the risk that the public pension fund will not achieve its assumed rate of return. And in practically all states, the defined benefit that public sector employees are paid are guaranteed under the state constitution. What a scam on the taxpayers.
This is why you should care whether the 8% assumption is reduced whether you are in the PERS system or not. When PERS does not average an 8% return—and it's probably not going to—the State of Mississippi will have to come up with the money to fund the shortfall. Where is that money going to come from? The State is strapped for cash already.
Those vested in the system would just as soon keep the 8% assumption, since lowering it will require increasing participant contributions or reducing future benefits.
Governor Barbour did the right thing by appointing a commission to study the PERS system and the leadership of the commission is in good hands with Gulfport Mayor George Schloegel. If and when the commission makes any recommendations, I may be back saying that they are recommending the wrong things. But at this point the train is on the tracks.
