State retirement benefits on the chopping block UPDATE | Arkansas Blog

Thursday, January 17, 2019

State retirement benefits on the chopping block UPDATE

Posted By on Thu, Jan 17, 2019 at 8:18 AM

click to enlarge apers.png
Michael Wickline reports for the Arkansas Democrat-Gazette today on the board of the Arkansas Public Employees Retirement System's move to make retirement benefits both more costly and less lucrative.

I remain unclear on the key element of the plan —

to ask lawmakers to give trustees the flexibility to set the annual cost-of-living adjustment for retired members somewhere between the consumer price index and a 3 percent rate that is not compounded.
Does this mean an annual payment to reflect a rise in the cost of living is not compounded only if 3 percent is paid? Or does it mean it is not compounded no matter the size of the payment? This is a BIG deal. If it's the latter, it's no longer a COLA at all but an annual bonus.

With no compounding of amounts that recognize the rising cost of living, a public employee who retired today with a $700 monthly benefit could expect to be receiving $700 a month 20 years from now, plus an annual payment that reflected the rise in the consumer price index that year, if any. The longer you live, the behinder you would get, in other words.

I've asked Rep. Doug House, who expects to introduce legislation along these lines, for some clarification. Today this just applies to APERS. But the larger Teachers Retirement System and smaller retirement systems for highway workers, State Police and judges (I'm a related beneficiary of that plan) are also likely to be targeted for cost savings.

UPDATE: I think I get it now. The change is not as big as I thought, but a change. Annual payments to reflect cost of living increases would add to monthly benefits over time, but be computed against the benefit at retirement. Thus an increase of up to 3 percent would be computed against starting retirement and added — that move to $1,030 a month for a person retired at $1,000 a month. A 3 percent raise the next year would be a simple payment of $30 more, not computed on the $1,030 being paid. No interest on earned interest, in other words. This will produce a significant savings over time, particularly if there is not an automatic 3 percent increase.

The currently independent systems have varying degrees of financial stability with differing so-called unfunded liabilities. A guaranteed 3 percent compounded increase is a VERY good deal for retirees and expensive in the form of a compounding cost of benefits. It not only has tended to beat the CPI increase in recent years, it regularly exceeds the pay increases given by the legislators to active state employees.

The change in the COLA is the biggest ticket item, but it is not the only way legislators and the APERS board (now controlled by Gov. Asa Hutchinson) aim to reduce pension costs. Other proposals:

* Raise from 5 percent to 6 percent of pay the amount employees must contribute to their retirement. Governments pay roughly 15 percent.

* Cut the multiplier in the pension formula from 2 percent to 1.8 percent times years served. A newly retired 25-year employee would thus see a 5 percent drop in benefits now offered.

* Cut the interest rate paid on members' contributions from 4 percent to 2 percent annually. That's a 50 percent cut in investment return.

* Figure retirement benefits based on an average of the highest five years of pay rather than three for new members beginning next year. This won't affect the many long-term legislators who have moved into high-paying state jobs covered by APERS. They can calculate benefits on three years of state executive pay.

UPDATE: Rep. House today filed shell bills, the specifics missing, to alter COLAs for all four of the state retirement systems. He said that they had decided to set future simple COLAS on current benefits, not on benefits when originally awarded.

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