Problems with Colorado’s public employee pension system are making it hard for our state government to attract some of the best employees. That’s the persuasive finding of a new study by the Urban Institute, a left-leaning think tank in Washington.
An employer’s retirement plan is part of an overall compensation package designed to entice and retain talented employees. Yet as detailed by the Urban Institute, the Colorado state government’s Public Employees Retirement Association (PERA) is failing in that task.
The Institute surveyed state and local plans across the country, grading them on how well they served younger workers, shorter-term workers, and career employees. For all three categories, PERA isn’t working.
Because state government workers must wait almost 20 years to see substantial benefits aside from their own contributions, PERA gets graded with an F for rewarding younger workers, and a D for short-term employees.
PERA was designed in an age when many employees worked for a single employer for their entire career. But these days, workers are more mobile. Short-term employees are not only young employees; they can also be mid-career workers looking for a change, or trying their hand at government service after a couple decades in the private sector. PERA’s unfair benefits system discourages such people from devoting their talents to public service.
Remember, these people give up their Social Security for the duration of their mandatory PERA membership as a state employee.
As for long-term employees, PERA’s generous pensions get a grade of A. This finding by the left-leaning Urban Institute confirms similar findings by the right-leaning American Enterprise Institute, in their own study of PERA.
Unfortunately, after long-time state employees reach their early 60s, their benefits actually decline as a percentage of their final year’s earnings. Little wonder that the average age at which a PERA member retires is just over 60.
By encouraging people to work until 60, and then retire soon thereafter, PERA deprives the government and the taxpayer of some of its most experienced employees’ services. They could be mentoring younger workers, or helping mid-career innovators become fully proficient.
The shortcomings would be difficult to justify, even if PERA were well-funded. Instead, the Urban Institute, like previous studies by the Independence Institute, found that PERA’s promised benefits are far from secure: PERA got an overall D on funding levels, including an F for the fund that covers state employees.
The Urban Institute is not a hotbed of right-wing anti-government activism. The Institute was founded in 1968 by Democratic President Lyndon Johnson to provide information about how to make big government work more effectively. The current president, Sarah Rosen Wartell, is co-founded of the Center for American Progress, which is the major Democratic think tank in Washington. The Urban Institute’s current Board Chairman is Jamie Gorelick, former Deputy Attorney General under President Bill Clinton.
The Urban Institute argues that state employees would be better off with cash balance plans. As with an IRA, a cash balance plan keeps all of the employee’s contributions, plus the employer’s matching contributions, in a personal account, which the employee owns. A cash balance plan is the opposite of PERA’s pension system, whereby all employees must pay into a general fund, which promises to pay them a particular amount of money monthly when they retire.
But that promise can only be kept if there is enough money in the general fund, and in PERA’s case, there isn’t. Cash balance plans are a far fairer approach to younger and more mobile employees. They vest more uniformly, and avoid delaying rewarding younger employees in order to pay current or near-term benefits.
Employees respond to incentives, and right now, PERA is not creating incentives for some of the best workers to begin or continue careers with our state government.
Change is coming to Colorado’s public employee pensions. For younger workers, for those who choose government service after success elsewhere, and for the rest of us who want a motivated, quality state workforce, that change can’t come soon enough.
Joshua Sharf is a fiscal policy analyst for the Independence Institute, a free market think tank in Denver.
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