DENVER – A seemingly mundane conversation Friday in the Colorado Senate about retirement reform turned into a political debate.
Senate Republicans gave initial approval to a measure that would allow all public employees to participate in the Public Employees’ Retirement Association defined contribution plan.
Only select employees – such as lawmakers – are allowed to participate in the defined contribution plan since it tends to favor short-term state employees.
Most employees must participate in a defined benefit retirement plan.
The difference between the two comes down to how retirement benefits are calculated for the state’s hundreds of thousands of current and former public employees.
In a defined benefit plan, benefits are based on a formula and are paid monthly for life. The calculation is based on the employee’s age and salary at retirement.
In a defined contribution plan, benefits are determined by investment earnings and losses. Employees in this plan risk outliving their investments, but they make their own investment decisions.
Sen. Owen Hill, R-Colorado Springs, the bill’s sponsor, said the measure is about offering options.
“This is not doing anything other than giving a choice that already exists to the rest of us,” Hill said during remarks on the Senate floor.
Sen. Ellen Roberts, R-Durango, said she chose the defined contribution option for herself.
“This is a bill about choice, it is about having the beneficiary drive it,” Roberts said. “I recognize that I am making choices and driving the future of my retirement.”
Interest in PERA peaked as reports revealed that the system is carrying at least $25 billion in unfunded liabilities. Lawmakers addressed its stability in 2010 by requiring an increase in the employer and employee contribution rates to PERA, as well as a limit on the annual cost-of-living increase.
But Hill said the system is still unstable, and that employees should have the option of controlling their own investments.
“The notion right now that PERA is this bastion of stability is unfortunately ill founded,” Hill said.
Democrats, however, were in a tizzy over the measure. They pointed to a fiscal analysis that indicated that the change would increase PERA’s unfunded liabilities.
State fiscal analysts said the bill could add about $4.2 billion to PERA’s unfunded liability.
“It takes us in the wrong direction,” Senate Democratic Leader Morgan Carroll of Aurora said of the bill. “It reduces retirement security.”
Democrats worry that the measure would result in uncertain benefits because calculations would be based on investment gains and losses.
“We are tying the fate of thousands and thousands of hard working Coloradans to the whims and tides of Wall Street,” Carroll said.
Greg Smith, PERA’s executive director, told lawmakers during an earlier committee hearing that they should think of the current system as a hybrid of defined benefit and contribution plans. He said employees see a benefit associated with the dollars they pay into the system, similar to a defined contribution plan.
He added that employees benefit from a guaranteed return, which now is about 3 percent under the current system.
“This system allows them to never have to make a choice,” Smith said. “They get that benefit from day one of employment in PERA, and they don’t have to make a choice all the way until they’re 65, and they get that coverage in that hybrid feature.”
Republicans, however, were steadfast that the current system is already broken, so employees need choice.
Sen. Kevin Lundberg, R-Berthoud, went as far as to compare PERA to a “Ponzi scheme.”
“You’re always relying on someone else to come in and provide the funds for the outflow today,” Lundberg said. “To me, it’s much more appropriate to allow individual employees to choose what they think is best.”