Iowa Public Employees’ Retirement System (IPERS) is currently only 81% funded. It should be 100% funded. IPERS covers a wide range of workers including city, county, state, and school employees. At 81% funded, there is about a $6 billion unfunded liability. “Government pensions, as most are set up today, are another long-term entitlement program with insufficient funding…” (Thornton, 2014).
IPERS contributions come from state employees during their employment with the state. The money is invested and during retirement each employee becomes the beneficiary of the promised defined benefit. The defined benefit is calculated based on the employee wages over the highest 5-year period (changed in 2012 for new employees) and years of service. The unknowns of the IPERS program are the life expectancy of the employees (years spent in retirement drawing IPERS benefits), earned interest from investment in stocks and bonds, and number of state workers paying contributions. “The increase in retirees and reduction in employees reflects that a defined benefit plan is basically a Ponzi scheme – if the previously allocated money does not earn enough to pay the current beneficiaries, the new money will be used to pay those beneficiaries.” (Thornton, 2014).
A formula is used to determine the employee contribution that will meet the determined average benefit payout during retirement. Simply stated, if the contributions paid in by a state employee plus interest (investment gain) is less than the expected retirement benefit paid out to that employee, the program is not fully funded. When the IPERS is not fully funded, where will the money come from?
1. A reduction in promised pension benefits?
2. State taxes paid by all Iowans?
3. Younger state employees contributing more to IPERS to make up the shortfall?
All options have disadvantages and are not fair. The decisions of past politicians makes correcting this problem difficult, but “kicking the can down the road” is not a solution. Fortunately there are several other options that could be implemented (Thornton, 2014):
- Increase the retirement age.
- Use the highest 7-year wage instead of the highest 5-year wage when calculating the retirement benefit. The 7 years would match the vesting period.
- Convert from a defined benefit plan to a hybrid plan where a portion of benefits would remain a defined benefit so an employee knows that they are getting “x” dollars each year of retirement. The other portion would be a defined contribution plan, similar to a 401K plan, where an employee’s retirement benefits would be determined based upon how the employee’s investments performed over time.
As Treasurer of State, Keith Laube will focus his energy to persuade the State General Assembly to get IPERS fully funded so Iowa’s taxpayers will not end up paying the $6 billion liability.
Thornton, Deborah D., Public Interest Institute, IPERS – Is “OK” Good Enough?, February 2014. Reprinted by permission from the INSTITUTE BRIEF, a publication from the Public Interest Institute.