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State Taxpayers Cover Shortage When Pension Investments Lag

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The Tampa Tribune

Published: May 20, 2008

Florida has the nation's best state pension fund. It's one of a very few that is fully funded, meaning if its investments continue to do well, taxpayers won't have to pay more than they're paying now to cover promised benefits.

Yet voters need to pay attention because past results don't guarantee future performance. The way the system is set up, taxpayers take all the risk.

Already taxpayers are contributing 8.69 percent of the annual salaries of ordinary workers into the pension fund and 15.37 percent for elected officials.

Why elected officials get a sweeter pension is a separate issue. A more important consideration for taxpayers is how much more they might have to pay to cover generous pension benefits in years to come.

In the 2006 budget year, the pension fund's investments grew by 18.07 percent, an astonishing rate of return. But for the past year, it has been only 3.2 percent and falling. The fund's investments in domestic stocks actually lost money.

Retirees getting their monthly pension checks don't need to worry because their benefits, along with a cost-of-living raise each year, are guaranteed. Any gap between the promise and the financial reality is covered by taxpayers.

That means workers in the private sector, most of whom don't have pensions, will probably be paying more to guarantee comfortable retirements for an increasing number of government retirees.

Also, the ratio of retirees to workers in the plan has increased rapidly. In 1995, the plan paid retirement checks to 25 people for every 100 active workers. By the end of 2006, the ratio was 47 to 100.

Meanwhile in the private sector, employers are phasing out pensions and workers are challenged to save enough for their own retirements. USA Today recently warned workers to expect lower returns on their investments in their retirement accounts and their homes.

"Americans need to face a sobering fact," the newspaper said. "They're not likely to have as much money for retirement as they'd projected, which means that many of us will have to save more, expect less and work longer than we'd planned."

The exception is for retirees of the state pension fund, who get a lifetime income guaranteed to increase each year. For many of them, the return is equal to half their pay. For some, it approaches full pay.

That is in stark contrast to the situation faced by private-sector workers. The Employee Benefit Research Institute estimates that about half of U.S. workers have less than $25,000 in retirement savings, and 36 percent of workers 55 and older have that much or less.

During a long period of slow economic growth, Florida will have to increase the burden on taxpayers to make good its generous promises to government retirees. The fund has $137 billion invested in about 14,000 securities. The slower these investments grow, the more taxpayers must kick in.

A prudent proposal by state Sen. Mike Fasano of Pasco County to phase out the guaranteed pension for new state employees and replace it with investment accounts similar to a 401(k) won little support in the Legislature.

He should try again next year.

Florida should be proud of having the nation's healthiest state pension. It's less commendable to put taxpayers on the hook to pay for fat promises in lean economic times.

Third In A Series

Abuse No. 3: Florida guarantees its public workers a lifetime pension benefit that is unaffected by gains or losses in pension-fund investments. Even though the fund has been well managed, taxpayers have an open-ended responsibility to cover any future shortfall.

The Solution: The Legislature should follow the example of private companies and phase out the guaranteed-benefit pension plan. New employees should instead be offered retirement accounts with returns that reflect actual market performance.

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