By Retiree John Kiljan
February 23, 2010
I don’t think most retirees have any idea as to how big a financial hit they are taking now that Senate Bill 1 has become law. For career State employees just beginning their retirement, think of your house burning down after you let your insurance lapse and you will be pretty close.
Going from a 3.5% to a 2% COLA doesn’t sound like much of a sacrifice, but the math says otherwise. I ran my own benefit numbers through a spreadsheet and was astonished by the losses. It’s over $20,000 in the first six years alone. After that the loss grows exponentially. By the time I am 80, Senate Bill 1 will have reduced my monthly pension by 25%. Over the expected lifetime of myself and my wife our losses from SB 1 will exceed a half a million. I strongly encourage every retiree to run their own numbers.
But, it’s worse than that. Those are optimistic estimates figuring a 2% COLA each year. However, if PERA experiences an investment loss in any given year, future COLA’s can be lowered even further for years afterward. If history is any guide, PERA will have an annual investment loss a couple of times a decade.
There’s more. If this bill passes court muster or goes unchallenged, the legal precedent will be set. The Legislature can repeat its past follies and lower its own contribution rate still further during the next budget crunch and once again increase benefits and buyback provisions to encourage budget-saving early retirements. After that, the Legislature can just adjust the COLA (or any other retirement benefit) even lower whenever it decides there is yet another ‘actuarial necessity.’ Indeed, the bill even has language in it that warns retirees that the Legislature has the right to make further benefit cuts in the future.
Could it get even worse? Yep, it sure could. We could have a repeat of the late 1970’s. That’s when years of billion-dollar federal deficit spending sparked high inflation. The very things that PERA invests our pension funds in, stocks and bonds, got hammered. The stock market fell 25% and the value of bonds plummeted as the Federal Reserve cranked up interest rates as high as they could to bring inflation back under control. The purchasing power of the dollar fell by more than half. Financially, there was nowhere to hide.
Since then, those billion-dollar federal deficits have turned into yearly trillion-dollar deficits. Retirees were already vulnerable to inflation before Senate Bill 1 became law. Now, it is downright scary.
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Despite the ‘2/2/2 Plus’ marketing and lobbying campaign, it’s pretty hard to believe PERA’s assertion that the pain is being spread equitably among employers, existing employees, employees yet to be hired and among those already drawing their retirement benefits. The truth is that the bulk of money for ‘saving PERA’ comes from retirees–90% by SB 1’s own sponsors’ estimate. Why? Because as one lawmaker put it (probably unaware that he was quoting the famous bank robber, Willie Sutton, when asked why he robbed banks), “that’s where the money is.”
Where should the money to fix PERA really be coming from? The one organization that made these retirement promises in the first place and then decided not to fund them–the State itself.
If anyone wants an impartial confirmation of that answer, they should read two eye-opening reports on states’ retirement funding from the Pew Center on the States. The most recent report, The Trillion Dollar Gap–Underfunded State Retirement Systems and the Roads to Reform, can be found at this link
You may have heard about the report in the media lately. The part that specifically deals with Colorado’s underfunding can be found on page 27.
How did this situation come about? Don’t believe it was just bad stock market returns and don’t overlook another December 2007 report by the same organization that tells you exactly what went wrong in Colorado. Here’s a quote from that report:
“Colorado once had a stellar record of responsibly supporting its pension plans—but that fell apart in recent years. The state experienced one of the most severe drops in pension funding levels of any state in the early years of the decade, and between 2003 and 2006, the amount of money the state contributed to its pension systems fell far short of annual required contributions.“
and one more,
” . . . practices in the late 1990s allowed [Colorado] employees to buy five to 20 years of service at ‘fire sale prices.’ Although the program certainly cut the workforce, it added significant costs to the pension system and contributed to the dramatic drop in funding levels from about 105 percent funding in 2000 to about 73 percent funding at the end of fiscal year 2005. ‘It was not an actuarially sound price,’ one Colorado finance official told the GPP [Government Performance Project] in 2005.“
The 2007 report, Promises with a Price, can be found at
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I’m sorry to worry existing retirees about the risk of devastating inflation in their senior years, but I’m also sorry to see them lose so much of what they were promised over their working lives. We’ve certainly had a lot of fear mongering from PERA in the last few months, and it’s past time to hear the other side of the story.
Remember, PERA doesn’t work for you. It never did. It was created to administer our pension plan by the General Assembly of the State of Colorado. Retirees get some representation on its board, but its administration answers to the Legislature and to the Governor. It does not answer to its retirees and vested employees whose contributions they hold.
So what is next?
On the face of it, SB 1 COLA provisions violate the contract provisions of both the Colorado Constitution and the U.S. Constitution. No other state has been able to reduce employees’ vested benefits after retirement. The courts could easily overturn all or part of this bill. But, they will only do that if they are asked for a ruling. To do that requires legal action of some kind, and we’ll probably only have one shot at it.
Consider carefully, retirees: Wouldn’t it be foolish for you not to contribute to any viable class-action legal fund that starts up? I also put that same question to all present and former State employees who were frightened into supporting this bill. I heard plenty of you during committee testimony. And, I’ll put that question to all those organizations that PERA said had its members’ support to cut vested benefits. Even if this bill is upheld as being constitutional, a court ruling could limit additional benefit cuts for retirees in the future. Right now, there is no limit.
A contribution to a class-action suit could be the best two or three thousand dollars a PERA retiree ever invested.
vested adj (ca. 1766): fully and unconditionally guaranteed as a
legal right, benefit, or privilege <the ~ benefits of the pension plan>
– Webster’s New Collegiate Dictionary