How Wisconsin Fully Funded Its Retirement System

As many state pension plans struggle with severe underfunding, the Wisconsin Retirement System stands out with a funded ratio above 100 percent

Special Guest Perspective by Kerri Seyfert

As many state pension plans struggle with severe underfunding, the Wisconsin Retirement System (WRS) stands out with a funded ratio above 100 percent. This can be attributed to pragmatic efforts and plan flexibility, nontraditional aspects that ultimately enabled the system to swiftly regain full funding after past market declines.

Wisconsin outranks other states when it comes to pension funding. While national public plan funding averaged 72.1 percent in 2017, WRS reported a market value-based funded ratio of 102.9 percent and an actuarial value-based funded ratio of 100 percent. This wasn’t something that happened by chance, but rather through a series of careful considerations and thoughtful, timely reforms.

Wisconsin’s experience with public retirement systems began with the creation of the Milwaukee Police Pension Plan and the Milwaukee Fire Pension Plan in 1891. The state and many local governments quickly followed suit. By the mid-1940s, Wisconsin had a myriad of pension systems covering a wide variety of state and municipal employees. The state legislature created a Joint Legislative Interim Committee on Pensions and Retirement Plans to study the state’s public employee retirement landscape. Committee members were concerned with problems of coordination and financial sustainability that a large number of systems across the state posed, along with early retirement incentives provided by some plans.

In 1947, the committee reported back with goals and recommendations for the sustainability of the retirement systems. After calling the state’s current array of pension plans as bewildering as Alice in Wonderland, they recommended merging most of the current systems. Most local plans were closed to new participants who were instead placed in the Wisconsin Retirement Fund. The only exemptions were the separate city and county of Milwaukee employee pension funds and the different teacher retirement pension funds.

In order to ensure effective plan management and design, the committee examined previous plans to identify where they fell short. In these deficient plans, they discovered a commonality: objective actuarial information was not available; instead actuarial calculations were supplied by lobbyists or department heads. In addition to recommending the use of trained actuaries, the committee advised using conservative mortality and return assumptions.

The trend toward consolidation continued in 1975, when the Wisconsin Retirement Fund, the State Teachers Retirement System, and the Milwaukee Teachers Retirement Fund merged into the Wisconsin Retirement System. Police and fire pension funds, excluding Milwaukee, also consolidated into the WRS in 1977.

The plan they created provided a foundation vital for the WRS solvency that is seen today. The system is composed of a base level defined benefit pension guarantee, with a flexible account on top that adjusts based on plan performance. Included in the plan are the Core (formerly known as “Fixed” until 2005) and Variable Funds, where pension contributions are invested. Participants are able to place all of their contributions in the Core Fund or choose to put a portion in the Variable Fund, where the portfolio consists of common stocks and offers a possibility of higher returns but with more uncertainty. Instead of making risky promises in the form of annual cost-of-living increases, the system allows adjustments to annuities based on investment outcomes. For participants, this means they will see higher benefits in bull-market years but when the market declines, cost of living adjustments may be reduced or skipped.

Read the full column here.

Kerri Seyfert is a 2019 policy intern at Reason Foundation from Wisconsin.