The Mississippi Public Employee Retirement System (PERS) has $20 billion of unfunded liabilities. That’s approximately $16,000 for every Mississippi household.
Ninety percent of Mississippi households will never get a dime from PERS. They don’t work for the state government. They only pay into PERS through various government taxes. This creates some political tension.
PERS is a defined benefit retirement plan, meaning a public employee gets a predetermined amount of retirement money. Defined benefit retirement plans are time bombs, putting all the stock market risk on the taxpayers and none on the public employees.
Most private sector retirement plans, such as 401K plans, are defined contribution plans. Employees put in a defined amount and what they get out is determined by how their investments have fared. All the risk is on the employee and none on the employer.
Mississippi’s $20 billion PERS unfunded liability is clear evidence that our state needs to transition from a defined benefit to a defined contribution plan. So why don’t we?
Part of the plan is cost. A defined benefit plan is a huge luxury and makes state jobs attractive even if the take-home pay is not as much as a private sector job. Take home pay would have to increase to retain employees if the state switched to a defined contribution plan.
Another problem is governance. The PERS board consists of public employees. Why would they want to cut their own benefits? In fact, the entire state legislatures and all public office holders are PERS beneficiaries. There’s no way these folks are going to cut their own retirement. In fact, gaming the state retirement system is an art form.
One reform could be in altering the formula for defining the benefit. Currently, the payout is based on just a few years during which a state employee receives their highest income. As a result, a PERS retiree can get more in retirement than they averaged during their working years. This needs reforming.
Dealing with the $20 billion unfunded liability will not be a quick fix. Basic contract common law forbids the state from reneging on its promises. Any reforms will only affect future employees and future benefits.
So what is to be done? On a positive note, the $20 billion unfunded liability is a projection into the future based on some key variables such as estimated future investment income and the number of public employees. The projections go 40 years into the future. A lot can change between now and then.
In addition, you have to look at who’s making these projections: outside accountants who specialize in retirement projections. These experts have zero incentive to be rosy and every incentive to be pessimistic. You know the old saying: It’s better to under promise and over deliver.
As of right now, PERS is cash flow positive with little chance of that changing in the near future.
Let’s take the most recent year. (The financials and investment reports are available on the PERS website.) In 2022, there were $1.8 billion (page 140) in contributions to PERS. PERS paid $3.2 (page 143) in retirement benefits. That leaves a shortfall of $1.4 billion. Sounds bad, right?
But bear in mind PERS has an investment portfolio of $31 billion, which gets an average return of 7.8 percent a year. That’s an average annual return of $2.4 billion a year.
That means PERS is running an average positive cash flow of one billion dollars a year.
That’s why PERS investment portfolio has grown from $21.7 billion in 2013 to $30.8 billion by the end of 2022 (page 125.) That’s an increase in the PERS portfolio of $10 billion over nine years.
So how do you get a $20 billion unfunded liability out of that? Simple. Given enough years and enough pessimism with the key variables, you can create any deficit you want. The main variables are investment return, mortality rates, number of contributing state employees and the number of retired state employees.
For instance, low inflation, low fixed income returns and higher longevity marked the last decade. This led to recent adjustments in anticipated returns and death rates. The assumption changes produced huge unfunded liabilities. Nothing changed except a pessimistic tweaking of the assumptions.
In Mississippi, these more conservative assumptions were voted on by a board of directors, all of whom are beneficiaries of the retirement system. The resulting unfunded liabilities resulted in more funding for PERS which benefited the PERS beneficiaries.
The PERS board has an incentive to paint a negative picture so it can get more funding.
Ironically, high inflation has caused fixed income returns to soar just as the PERS board was decreasing their anticipated returns. Meanwhile, Covid-19 has actually lowered lifespan longevity. So these assumption tweaks are probably misguided.
Another irony: The Republican ascendency in state government created the PERS problem. They cut the number of state employees, creating an imbalance between the contributors and the beneficiaries. If state government started to grow again, the PERS unfunded liability would change dramatically.
In fact, the Governmental Accounting Standards Board calls for pessimistic and conservative retirement funding assumptions. Not the most accurate, but the most conservative.
This voracious funding for PERS puts a huge strain on cities, counties and government agencies which have to raise taxes to fund PERS to a higher and higher amount, even while it’s generating a billion dollar surplus each year.
I’m not saying we don’t have an issue to deal with. We do. But before we start saying the sky is falling, let’s have a sanity check and balance a billion dollar annual positive cash flow with a 40-year model governed by discretionary variables.
It’s just like the climate change models declaring the end of the world. Tweak a few key variables one way, the world ends. Tweak them another way, it’s climate paradise forever. It’s the same situation with PERS.
