The power of the PERS
In light of recent turbulence within the economy, many Nevadans now have serious concerns about their future. Unless they are paid with tax dollars, that is.
The Nevada Public Employees' Retirement System is a wondrous institution—one wonders why policymakers have allowed it to continue so long as currently structured. No retirement system of its kind could ever exist in the private sector, able, as it is, to shift all of its investment risk onto other people.
The central problem with NV PERS is that it is a defined-benefits retirement system. This means that retired government workers are guaranteed to receive defined retirement payments whether or not NV PERS actually has the resources with which to make those payments. Any shortfall would have to be made up by higher taxes on private-sector workers.
Private-sector retirement packages such as 401K, on the other hand, are defined-contribution systems. Workers pay into the retirement fund a given amount, which is often matched to some extent by the employer, and the fund manager invests the moneys over a range of financial assets. When the worker reaches retirement, the value of the assets he has acquired through his retirement account is the amount that is available to him through his retirement years, whether or not the investments have gained or lost market value. Hence, workers in the private sector bear their own investment risk—in addition to bearing the risk for government employees' investments.
This subsidized risk is particularly significant given recent market turmoil. NV PERS' financial reports at the end of FY08 show that the unfunded taxpayer liability for PERS benefits approached $7.3 billion. Since then, PERS officials have testified before the legislature that the retirement system's assets have lost over $4 billion in value—bringing the total unfunded liability to $11.5 billion. For comparison, the state's entire general fund revenue for 2008 was only $3.05 billion.
NV PERS differs in another important way from private retirement funds. While private retirement funds require contributions from the employee, which may be matched by the employer, public employees in Nevada typically have to contribute very little to their own retirement. The very contributions upon which their retirement savings are based are paid mostly by taxpayers. According to NV PERS financial reports, taxpayers provided $963 million of the $1.06 billion in contributions in FY08—meaning that public employees only made 9.5 percent of the contributions toward their own retirement fund.
While government workers traditionally have accepted lower pay raises in exchange for government making part of the employee retirement contribution, this no longer occurs. Pay raises for state employees today are set at such astronomical rates that they effectively offset any pay-raise lowering that would otherwise take place. In some cases, state employees may have received as much as a 74.9 percent pay raise over just the past seven years. Nevada taxpayers have not only been responsible for the unfunded liability of PERS, taxpayers have effectively financed the majority of the funded portion as well. Public employees in Nevada have the rare luxury of not needing to plan for their futures as private families and individuals do.
The problems created by NV PERS are likely to only worsen over time. The number of retirees receiving benefits has nearly doubled over the past 10 years, going from 18,038 in 1999 to 33,479 in 2008. This rate of growth is not expected to decrease in the near future. Nevada public employees typically retire much earlier than workers in private industry. Most employees are eligible to retire with full benefits after 30 years of work while police and firefighters can do so after 25 years. Because of these early retirements, the average public employee in Nevada receives retirement payments for 12 years longer than do private-sector workers. This trend has prompted some policymakers to call for reforms that would, among other things, raise the retirement age.
These reforms must come now. Recent economic turmoil and the resulting depreciation of NV PERS' assets have highlighted the problems with a defined-benefits retirement system. Private families in Nevada should not be forced to invest in the future of what now operates as a ruling class and then assume all the risk on that investment when they are struggling to provide for their own future.
It was self-serving of our government-employee-dominated state legislature to ever implement such a system. Policymakers should act with haste to find a new approach before private families are forced to shoulder a burden of such outrageous proportions.
Geoffrey Lawrence is a fiscal policy analyst at the Nevada Policy Research Institute. This article originally appeared in the February 2009 edition of the Nevada Business Journal.