The Bigger Pie Forum, a Jackson organization that advocates good government, has identified two “structural impediments” in the Public Employees Retirement System that prevent it from producing all the money it needs for Mississippi’s retired public workers.
The biggest problem PERS faces is that its assets, even though they are increasing in value and are now worth more than $25 billion, are not keeping up with the money needed to pay retirees.
The PERS unfunded liability, meaning the difference between what it owns and what it expects to pay out in the future, has been increasing despite an 11-year economic expansion and a strong run in the stock market.
The retirement system’s unfunded liability was $17.6 billion last June, at the end of the state’s fiscal year. That figure increased by a whopping $700 million in just one year.
Put another way, at the end of the 2018 budget year, PERS had 61.8 percent of the money it needed for the future. At the end of 2019, it only had 60.9 percent.
Again, the big concern is that this is occurring during a period of strong investment returns. What happens when the economy dips, as it eventually will do?
The people that run PERS saw this coming. In 2018 they increased the employer contribution to the retirement fund to 17.4 percent of an employee’s salary. As the employers are public schools, cities, counties and state government, that means the money is coming from taxpayers.
By any measurement, that is a generous contribution. But the problem of unfunded liabilities is likely to continue.
A big reason is that the number of government employees in Mississippi is trending downward, which means there are fewer workers to contribute to the retirement fund.
A second problem is the country’s current low-interest rate environment. Most fixed-income investments like government or corporate bonds have been sold at very low interest rates for a decade, around 2 or 3 percent.
Bigger Pie quoted bond expert Bill Gross: “Artificially low interest rates destroy the savings function so necessary for capital to be invested in the real economy. Pension funds, insurance companies and any finance-based structure with long liabilities are slowly being strangled because they cannot earn their assumed return. The same goes for mom and pop savers, as they struggle to earn for retirement.”
PERS is required to invest a significant amount of its money in these low-yield assets. They virtually eliminate the risk of losing money — but they also make it more difficult for PERS to produce the rising amount of money it will need in the coming years.
Bigger Pie has identified another problem, one whose solution is sure to upset retirees. PERS currently increases its retirees’ annual payments with a 3 percent cost-of-living adjustment. That’s too high in the current low-inflation economy, and Bigger Pie believes it should be linked to actual changes in the inflation rate.
These COLA payments, as they are known, are increasing rapidly. Bigger Pie said that in 2005, COLA payments to retirees totalled $211 million, or about 19 percent of the benefits that PERS paid. By fiscal 2019, COLA payment had grown to $700 million and 25 percent of benefit payments.
That’s a steep increase in a short period of time, and if the trend continues, it will eventually cause real financial problems for PERS.
For now, linking the cost-of-living adjustment to inflation may mean retirees would get a smaller annual increase. But their benefits still would rise while allowing PERS some breathing room that it clearly needs.