February 2012 Brief: Volume 19, Number 4
|Click Here for a pdf verison.|
IPERS Needs More Reform
by Deborah D. Thornton
Iowa has the largest government/private-sector pay gap in the nation. In 2008, state-government workers earned $1.48, on average, for every $1.00 earned by a private-sector worker. “Iowa has held that status not only since 1996, but has held the top spot among states for the largest Pay Gap between government workers and private-sector workers for over two decades,” said Amy Frantz, Vice President for Research at PII in March 2011.
An important part of the government employee pay and pay gap discussion is retirement benefits. The impact of legislatively approved retirement benefits on state government budgets, the long-term budget liabilities, and the effect on taxpayers is significant.
The Iowa Public Employees’ Retirement System (IPERS) was originally set up in 1953 and is a traditional defined benefit system. The amount an employee receives in retirement is based on “years of service, a multi-year average covered wage, and a multiplier.” IPERS covers a wide range of government employees, including those working for public schools, state agencies, counties (99), cities, and townships. The majority (51 percent) are school employees. As of 2010, there were 165,660 active working members and 93,700 retired members.
Though the Legislature made changes to IPERS in 2011, the changes do not take full effect until later this year. Changes include increasing the employment time required for full vesting, a longer period of time for figuring average pay, and higher contribution amounts for both the government and the employee. The changes only apply to new hires, not those currently in the system. They are expected to increase the overall viability of the IPERS system, but problems remain.
It is important to recognize that the contributions to IPERS come from state taxes paid by private-sector workers. In Iowa, government employees make contributions to their own retirement, but the majority of the contributions come directly from the government via the taxpayers.
Currently, the state government contribution amount for most employees is 8.07 percent. The employee contribution is 5.38 percent. The maximum wage covered by IPERS as of 2010 is $245,000. A “Regular” category worker who makes $245,000 or more per year — of which there are many in Iowa’s government — would have $13,181 withheld from their paychecks and deposited to IPERS. That individual would have another $19,771 contributed directly by their employer, the government, for a total of almost $33,000 per year.
The most recent report shows current funding for payable benefits at less than 80 percent of the long-term requirements. In 2010, IPERS had almost $21.5 billion in assets. Unfortunately, the liability is greater than the assets. The total unfunded actuarial liabilities (UAL) as of June 30, 2011, were $5.682 billion.
The total actuarial liability is $28.257 billion, with an actuarial value of the assets at $22.575 billion. The “actuarial” figures differ from the “cash value” figures, and are adjusted based on the various factors influencing real pension payments.
The IPERS funding ratio has been on a fairly steep downward trend for the last ten years. From a high of 97.9 percent funded in 2000, IPERS is at a low of 79.9 percent this year. Defined benefit pension plans operate on the presumption of both additional incoming funds and growth in currently held and invested funds. The effect on the IPERS funding ratio of the 2008 recession and drop in the stock market was significant.
The ten-year average return is now only 3.98 percent, not the estimated, and needed, 7.5 percent. Some experts have recommended using an expected return rate ranging from 5.22 percent, the private-sector standard, to 4.38 percent, the return rate on a 30-year Treasury bond. Using these figures, which may be more realistic going forward, will result in significant increases in the amount of unfunded liabilities — and correspondingly, significant increases in state budgets and state contributions to make up the difference.
If additional reforms are not considered and implemented by the Iowa Legislature, IPERS will remain at significant financial risk of under-funding in the future. The amounts owed to both current and future beneficiaries must be paid by future taxpayers — the younger workers of today. And many of these future taxpayers are already finding their financial future constrained because of a lack of jobs.
As the economy continues in a “jobless” recovery, the pension plans paying out income to retirees — especially to government workers — must have significant reforms, so that the burden on future workers and taxpayers will not be onerous.
Public Interest Institute’s POLICY STUDY “Iowa’s Privileged Class: Time for a Change!” can be viewed at http://www.LimitedGovernment.org/publications/pubs/studies/ps-12-1.pdf.
Deborah D. Thornton is a Research Analyst with Public Interest Institute, Mount Pleasant, Iowa. Contact her at Public.Interest.Institute@LimitedGovernment.org.
Permission to reprint or copy in whole or part is granted, provided a version of this credit line is used:"Reprinted by permission from INSTITUTE BRIEF, a publication of Public Interest Institute." The views expressed in this publication are those of the author and not necessarily those of Public Interest Institute. They are brought to you in the interest of a better-informed citizenry.
All of our publications are available for sponsorship. Sponsoring a publication is an excellent way for you to show your support of our efforts to defend liberty and define the proper role of government. For more information, please contact Public Interest Institute at 319-385-3462 or e-mail us at Public.Interest.Institute@LimitedGovernment.org