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Retirement compensation for long-term public employees

Friday, September 28 at 6:15 PM

This Speakout has not been edited.

By Michael Mannino and Elizabeth Cooperman

Retirement benefits to long-term state and local government employees are much more valuable than typical private sector retirement benefits. The Colorado Department of Human Resources (DHR) in its annual compensation surveys considers private sector retirement benefits larger, resulting in higher taxpayer cost and misallocated scarce tax dollars.

The claim by DHR contradicts the retirement reality between public and private sector workers. Many public employees in Colorado retire in their 50s with 75 percent of their highest three years of salary and good inflation protection. Comparable private sector employees retire at older ages with lower benefits and limited inflation protection.

We have strong evidence about the value of PERA benefits through a recently concluded study. PERA is the Public Employees Retirement Association, the agency that provides retirement benefits to many state and local government workers in Colorado.

Our study estimated the value of PERA benefits using a sample of salary histories for recent non-faculty university retirees with 30 or more working years. Our data used salary histories from 1970 to 2006 for 278 university retirees in the period 1999 to 2006.

We used a private sector standard to estimate the value of PERA benefits. Single Premium Lifetime Annuity (SPIA) products can be used to provide life-time income for private sector workers. Therefore, the value of PERA benefits is the cost to purchase a SPIA product at retirement providing the same monthly benefits.

To purchase comparable SPIA products, the average retiree in our sample would have required an additional lump-sum payment about $520,000 at retirement. This lump-sum payment is in addition to the account balance from both employee and employer contributions compounded at PERA’s guaranteed interest rates. A guaranteed interest rate is appropriate because PERA retirees bear no risk in retirement benefits.

The lump-sum payment is substantially larger in some cases. For example, administrative employees in our sample who retired in their mid 50s with highest salaries exceeding $100,000 would have required between $1,275,000 and $1,860,000 of additional lump sum retirement compensation.

In the state university system, future administrative retirees covered by PERA will be unusual. Most administrative employees, like faculty, are now included under defined contribution plans. Universities may provide a model for other parts of state government in attracting talented administrative employees without defined PERA benefits.

The state’s contribution rate substantially understates the retirement compensation hidden in PERA benefits. When the lump sum payments are allocated to each retiree’s working years, retirees in our sample would have had to receive on average 26 percent more compensation in each working year.

If the allocation is weighted to the number of working years, the average additional compensation needed in later working years would be even higher, about 36 percent. A weighted allocation approach is preferred because most public employee turnover occurs among younger workers with a small number of working years.

DHR’s misleading claim about retirement compensation threatens to undermine sound decision making about public employee compensation in Colorado. By understating PERA retirement compensation, the DHS surveys give the appearance that public employees are compensated lower than private sector employees.

The result of this misstatement may be high taxpayer cost and misallocated scarce tax dollars. Long-term state employees already receive large amounts of deferred retirement compensation. Scarce tax payer dollars should be concentrated on new hires in areas of strong competition with private industry rather than on long-term employees.

Michael Mannino and Elizabeth Cooperman, The Business School, University of Colorado at Denver and Health Sciences Center.

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