Mississippi’s state employees are griping because they again may not get an across-the-board raise. Schoolteachers are griping because the raise they may get is less than they believe is deserved.
One of the main factors, though, holding down their pay is the steadily rising cost of what it takes to provide them with their pensions.
Starting on July 1, the amount that employers — that is, you the taxpayers — have to kick in to cover state Public Employees’ Retirement System is rising to 17.4 percent from the current 15.75 percent. That means for every dollar a public employee makes, the taxpayers will have to kick in 17.4 cents — along with 9 cents from the employee — to fund the pension plan.
The latest increase will cost state and local governments an estimated $100 million extra a year.
But that’s only part of the picture.
This will be the eighth rate hike since 2005, when the employer contribution was bumped from 9.75 percent to 10.75 percent. The cumulative effect of all of these increases means hundreds of millions of dollars extra are going to the pension plan that could have been available to pay teachers and state employees more, not to mention cover other underfunded state needs.
Mississippi has put itself into a trap with its public employees — lower-than-average salaries while they are working but higher-than-average benefits when they retire. It is a trap from which it will not be able to extricate itself without major changes to PERS.
Bill Crawford, whose syndicated column runs regularly in the Commonwealth, has been following and writing about PERS’ troubling trajectory for several years.
Crawford, who spent 19 years working for the state, including four in the Legislature, is a PERS beneficiary. He also served on the study commission that Haley Barbour created during his last years as governor to try to get a handle on the escalating cost of PERS.
Other than some modest adjustments, though, the Legislature — which doesn’t want to rankle the powerful state retiree bloc, nor cut its own PERS benefits — largely ignored the commission’s recommendations. Thus, the reason for the latest rate hike.
Nor will it be the last, Crawford projects, as long as the pension system’s structural problems go unaddressed.
PERS’ financial projections are based on three assumptions: a good return on its investments, a rising number of public employees and wage growth for them. Even with decent investment returns the past two years, the system has been stuck with an unfunded liability of around $17 billion and a funding ratio of just over 60 percent. Translated, that means that even based on its current rosy assumptions, PERS will only have enough money to cover three-fifths of its future obligations to retirees.
The reason PERS has made little headway in reducing this “deficit” is because the other two assumptions — higher public employment and higher wages — have not happened. “With the Legislature shrinking government and not increasing pay, the other two legs are not doing their part,” Crawford says.
The situation is now what he describes as a “self-defeating cycle.” Hiking the employer percentage for PERS — plus tax cuts passed in recent years by the Legislature — has sucked up the money that could otherwise go to hiring workers and raising wages. Fewer workers and stagnant pay means less money for PERS. Less money for PERS means pressure to raise the employer contribution again.
Keep raising the rate and eventually PERS “explodes” into insolvency, Crawford warns.
To avoid that eventuality, Crawford says, there are several things that could be done, none of which beneficiaries would like. One is to reduce or temporarily eliminate the 3 percent annual cost-of-living adjustment. Another is to base benefits on a worker’s average salary over a lifetime, as Social Security does, rather than the highest four years, as PERS does presently. Another is to start taxing retirement benefits.
“Now I don’t want mine taxed, but I want the system to be viable,” he says.
One suggestion I have liked is to freeze the defined-benefit plan and put all new hires instead on a defined-contribution plan, such as the 401(k) plans that most private employers gravitated to when they discovered their defined-pension plans were unsustainable. That would also allow the government to raise the salary scale for new hires, which would help in trying to recruit and keep teachers, prison guards, social workers and other hard-to-fill positions.
Crawford says that idea won’t work, though, because PERS needs the money from the new hires to pay for the benefits received by retirees. “You would have to pay out the wazoo during the transition,” he says, to have both defined-benefit and defined-contribution plans operating at the same time.
Maybe he’s right about that. He’s certainly right that this is a crisis in the making that no one in power seems willing to address.
“It’s a complicated mess,” he says, “and the longer it goes on, it gets worse.”
• Contact Tim Kalich at 581-7243 or firstname.lastname@example.org.