Pension Systems Recovering, Still Best Value For Taxpayers

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by Dave Wells, Grand Canyon Institute

Glaring headlines about Arizona’s public worker retirement system suggest that your typical retired teacher, firefighter or police officer is sipping margaritas on a beach somewhere enjoying a six-figure pension. Meanwhile the state’s pension funds are running out of money, leaving you, the taxpayer, stuck with the bill.

Contrary to that alarmist image, Arizona’s retirement system provides only modest retirement security to public workers. When properly managed, this system represents the most efficient use of state dollars to help retired teachers, first responders and other public servants earn a level of security and economic certainty — a reliable retirement that eludes all too many people with 401(k) plans.

The most important question going forward, of course, is whether Arizona’s pension systems provide the most secure retirement to public workers at the best value to taxpayers. The answer, based on a recent comprehensive study authored by independent economists at the Grand Canyon Institute, is a resounding “yes.”

The study takes a fact-based look at Arizona’s pension system. One interesting finding: If you filled Sun Devil Stadium with 70,000 state retirees, only 181 people in the stadium would earn a six-figure annual retirement check. The typical annual state worker pension is only

$22,000 in Arizona. Though pensions for firefighters and police officers are a bit more than double that amount, almost all firefighters and most police officers do not qualify for Social Security, leaving them to rely exclusively on their pension check. Public safety workers hired before 1986 also don’t qualify for Medicare, meaning they must pay at least $7,000 annually for health insurance.

In 2011, Arizona lawmakers showed great foresight by passing Senate Bill 1609. Combined with other modifications to the Arizona State Pension plan since 2004, SB 1609 curtailed the growth of future pension liabilities, and increased cost-sharing with employees. Taxpayers are already feeling the benefit, and our public pensions are making their way toward solid financial footing.

Arizona pension systems now follow best practices as identified by the National Institute on Retirement Security. Our most vulnerable pension, the Public Safety Personnel Retirement System (PSPRS), has reined in permanent benefit increases to accommodate inflation. PSPRS has moved from having a portfolio that had too much risk relative to returns to among the top 10 percent of public pension portfolios in the country.

All Arizona retirement systems today share costs with employees, from 50-50 in the Arizona State Retirement System to a one-third/two-thirds split in PSPRS.

Although 401(k)-style plans are perceived as cheaper for taxpayers, they are actually more expensive. Given their higher management fees, studies show that about 50 percent more needs to be placed into a 401(k) plan than a traditional pension for the same level of retirement security.

Even more importantly, if Arizona shuts down its pension plans to shift all new workers to 401(k) plans, pension portfolios will need to shift toward lower-return, more liquid investments like bonds as they cash-out assets to pay retirees. This will increase taxpayer costs significantly. After two major financial crises since 2000, we cannot afford to hemorrhage billions in state funds to make such a shift.

Arizona pension funds had more than two decades of solid pension performance before 2001, and then were hammered by two unprecedented financial crises. Recovery takes time, but today Arizona is on a path to a sustainable retirement system that provides retired teachers, police officers and firefighters with the security they’ve earned.

Dave Wells is research director for the Grand Canyon Institute, a centrist public policy think tank focused on addressing economic and fiscal issues confronting Arizona. The full report, “Arizona Pensions: On Track to Financial Stability with Retirement Secur­ity,” is available at GrandCanyonInstitute .org.

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