Senior Fellow at the Cato Institute and a member of the Social Security Advisory Board
Many state and local public employee pension funds are struggling to make up large gaps in their funding — which cratered in the aftermath of the 2008- 2009 recession. The one exception is Wisconsin, which, through responsible management of Wisconsin Retirement System (WRS) finances, has successfully maintained close to full funding of its retirement system since 2001.
This paper reviews Wisconsin’s pension system to explore the reasons for its successful financial stewardship.
Similar accolades are not warranted, however, for Wisconsin’s Health Insurance Program, which provides pre-Medicare retiree coverage at subsidized premium rates. This benefit is funded on a pay-as-you-go basis. Evaluated on the same basis as WRS (under the reporting rules of the Government Accounting Standards Board), this other post-employment benefit (OPEB) program has an unfunded actuarial accrued liability equal to a burdensome 29 percent of all the future wages of active participants. Wisconsin would be better served by reducing its OPEB commitments and by introducing a new system of health saving accounts to fund OPEB benefits for younger and future employees.
The important features of WRS that help to secure its objectives are:
- No guarantees of annual retirement benefit increases and cost of living adjustments;
- Employee choice in contributing to funds with alternative investment styles;
- Provision of a benefit floor; and
- Annual adjustments to benefits above the floor according to investment performance.
In 2012, the WRS undertook policy measures that strengthened the system and reduced employer (and taxpayer) costs, including:
- Increased the creditable service work-hours requirement to 1,200 hours per year for regular employees and 880 hours per year for teachers and employees in education-related jobs;
- Introduced a five-year creditable service vesting period for those hired after June 2011;
- Reduced the benefit-formula factor for certain employee categories; and
- Eliminated contributions by employers of employees’ share of pension contributions.
The Milwaukee County Employee Retirement System also shifted its policy to require worker contributions after 2000. However, the Milwaukee County system is not as financially secure as WRS; its funding ratio is 87.3 percent, but the plan’s liabilities are discounted at the unrealistically high rate of 8 percent. The system needs reform to restore financial sustainability, possibly including better methods of liability assessment, more conservative investment of assets, asset-liability matching and the introduction of a defined-contribution plan for younger and future employees.
However, Wisconsin’s actuarial liability on account of post-employment health care benefits, which amounts to a significant share of the state’s general revenues, is totally unfunded. Moreover, under the assumptions employed by Wisconsin’s actuaries, the size of the liability reported in the state’s Comprehensive Annual Financial Report appears to be underestimated. Because current contributions (premiums plus state contributions) fall short of the annual required contribution, the taxpayer burden is likely to grow larger over time.
A reform that 1) charges higher premiums to retirees, 2) closes the health insurance program to younger and future employees, 3) and shifts young and new employees to a new pre-funded system with health saving accounts would be a fiscally sound reform. The sooner it is implemented, the better.
Read the full report by clicking here.