Today NPPC released a new report titled Oregon PERS Must Be Protected. The report considers the history of the Oregon Public Employees Retirement System (PERS) and the changes that have previously been made to it. The report then examines the experiences of other states in switching from defined benefit pensions to 401(k)-style plans and concludes that Oregon should avoid making additional dramatic changes to PERS.
PERS provides retirement security to nearly all public employees in Oregon. After major changes passed in 2003, PERS currently follows the “three-legged stool” model of retirement: Social Security; an employer-provided defined benefit pension; and a defined contribution plan financed by employee contributions. These changes reduced costs for employers and, therefore, for taxpayers, while still ensuring the foundation of a secure retirement for public employees.
Oregon is currently working to pay down an unfunded liability in PERS. As in other states, this unfunded liability is due, in part, to decisions made decades ago by previous governors and state legislatures. Especially in Oregon, the unfunded liability is also due to the consequences of the financial crisis. PERS has historically received a very high percentage of its revenue, more than 73 percent, from investment returns. This is a fantastic return on investment and a great deal for Oregon taxpayers. However, it makes PERS more vulnerable to downturns in the financial markets. In 2007, PERS was 111 percent funded. In 2008, PERS was 80 percent funded. PERS funding dropped 31 percent in one year due to the negative impact of the crisis. This is on the high end of investment losses suffered, but not too far off the average loss of 25 percent. Due to the uneven recovery since the financial crisis, PERS has not yet returned to its previously high funded levels.
The current effort to reduce the unfunded liability has caused some to foolishly call for dramatic changes to PERS. Specifically, some anti-pension ideologues and inexperienced public officials who don’t understand pension policy have called for placing all future public employees into a 401(k)-style, defined contribution plan. As the experience of other states has shown, not only will this do nothing to reduce the current unfunded liability, it will actually cause the unfunded liability to increase. That is exactly what happened in states like Alaska, Michigan, and West Virginia after they closed public pension plans.
The best path for Oregon is to stay the course and allow the changes passed in 2003 to continue to work. Over time, the unfunded liability should decline, both as the state makes additional payments toward the liability, and as the population of PERS retirees is increasingly made up of workers who began their service after 2003 and earned a smaller benefit than previous generations of Oregon public employees. Converting PERS to a defined contribution plan would not only increase costs for taxpayers, but it would gut retirement security for hard-working public employees.