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Green Sheet on WRS and Pensions July 8 2010

Green Sheet on WRS and Pensions July 8 2010

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Published by: Chris Capper Liebenthal on Jul 10, 2010
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AFSCME Council 11 Green SheetThe Wisconsin Retirement System and Pensions
 The Wisconsin Retirement System (WRS) is nationally recognized for the service itprovides 557,000 (active and retired) members and their families, who live andwork in our communities. The WRS was established decades ago to recognize thecontributions of public employees and to provide them with some security inretirement.Workers covered under the WRS include teachers, judges, corrections officers,university professors, child welfare workers, governors, blue collar workers,administrators, public health nurses, administrative support staff, buildinginspectors, librarians, police officers and countless more. Most public sectorworkers and retirees in Wisconsin are members of the WRS, and represent anestimated 12% of the Wisconsin adult population. The authors of WRS declared that the purpose of the pension system is to “aidpublic employees protecting themselves and their beneficiaries against the financialhardships of old age, disability, death, illness and accident, thereby promotingeconomy and efficiency in public service facilitating the attraction and retention of competent employees, by enhancing employee morale, by providing for thehumane departure from service of employees no longer able to perform their dutieseffectively, by establishing equitable benefit standards through public employment,by achieving administrative expense savings and by facilitating transfer betweenpublic employers.” The WRS provides economic security to public employees and their families, and isan important contributor to our state’s economy. According to the National Instituteon Retirement Security, in 2006, WRS beneficiaries spent some $4.5 billion,accounted for over 33,000 jobs that paid $1.7 billion in wages and salaries and over$730 million in federal, state and local taxes. The WRS has the advantage of having an economy of scale that enables it to offermodest pension benefits to its participants. This is one of its greatest strengths.Indeed, the WRS has some $60 billion in assets, well-managed by professionalinvestment staff employed by the State of Wisconsin Investment Board (SWIB).Roughly two-thirds of the more than $3.5 billion in WRS pensions paid each yearcomes from investment returns, not taxpayer dollars. The pensions enjoyed bypublic sector workers are funded largely from the smart investment returns madeby highly regarded in-house SWIB staff, who are accountable to the participantswho are represented by a board of directors.Recently, the Pew Center on the States, a national non-profit research organization,gave our state high marks for the WRS. According to Pew, Wisconsin is one of onlyfour states that has fully funded its pension system. The Pew report calls the WRS anational leader for managing its long term pension liabilities and its unique design.
By any standard, the WRS is well-funded and well-managed. Even with theimplementation of the new employee benefit liability rules, known as theGovernment Accounting Standards Board or GASB 45 rule, the WRS is consideredtop in the nation. The financing principle governing the WRS holds that the funds to pay pensionscome from three sources: employee contributions, employer contributions andinvestment earnings. The contributions are made annually and are carefullycalculated by the ETF staff with the expert advice of consulting actuaries.In most cases, employers in Wisconsin pay all or part of the employee contribution.Having the employer pay the employee’s contribution of the cost of the WRS benefitis a form of compensation to workers that is cheaper than paying higher wagesbecause WRS contributions, unlike wages, are not subject to Medicare and SocialSecurity taxes. Dave Stella, Secretary of the Department of Employee Trust Funds(ETF), has noted that because of this fact it makes perfect sense for an employer topay the employee's share in lieu of higher wages, since it saves money for both theemployer/taxpayer, and the employee.It is well established that, over the years, public sector workers have given up wageincreases in return for having the employer pay the employee’s share of employeepension costs. This system has worked well for all concerned not only because itmakes good economic sense, and also because employers recognize that manypublic sector workers are represented and have the right to bargain wage andbenefit packages under Wisconsin’s long-standing collective bargaining laws. Eitherside seeking concessions understands that there is a quid pro quo involved.A recent study of the WRS showed that the average state worker earning $48,000annually may be eligible for a monthly pension of approximately $1,700 uponretirement. This is a modest retirement income. It’s also an average, and includeshigh earning, high profile public sector jobs as well as less well-compensated jobs.Every participant in the WRS can count on some defined monthly income upon hisor her retirement.Under Wisconsin’s pension system, workers earn what is known as “defined benefit”pensions. That means, simply, that the monthly allotment is calculated based on aformula of years of service, earnings, etc., and that allotment is for the remainder of the person’s life. “DB” pensions provide workers with a modest predictableretirement. But even here, Wisconsin's system is recognized as a leader."Wisconsin has developed a creative way to share some of the risk of investmentvolatility with employees," the Pew report notes, highlighting the use of a dividendprocess in lieu of standard cost-of-living increases, which means retiree benefits arenot immune to market shifts. This unique design resulted in a 2.1% core annuitypension reduction for WRS retirees in 2009, and a 1.3% pension reduction in 2010,reflecting the difficult stock market environment in recent years.In contrast, many workers in the private sector have what is called “definedcontribution” pension systems, which means that they contribute a specific amountto a fund that they themselves are responsible for managing. “DC” pensions arenotoriously risky, and do not provide retirement security to workers. Under “DB”
plans, workers who put in their time are guaranteed an income. Under “DC” plans,there simply are no guarantees, and the burden of managing the investment isborne by the individual worker. The success private employers have had in taking benefits away from workers whodon't have unions protection certainly has fueled envy, especially in tough times.Opportunistic politicians have been eager to pile on. Instead of standing up andinsisting that all workers deserve dignity in retirement, the opportunists encouragea race to the bottom -- taking away benefits from those workers who still havethem. This year, Republican gubernatorial candidate Scott Walker is sounding off about how he wants state employees to pay for their portion of their pensions anduse the savings to offset the state’s growing deficit -- a deficit he has proposeddigging deeper by reopening corporate tax loopholes.Candidate Walker is not the only one taking aim at worker pensions. Earlier thisyear, former state DOA Secretary George Lightbourn, who now heads the corporate-funded conservative Wisconsin Public Research Institute, described the WisconsinRetirement System (WRS) as having “overstayed its welcome” and “far out of themainstream”. He said Wisconsin’s next governor should “make it a priority toeliminate the insularity that has defined the WRS.” WPRI’s agenda is to privatizethe WRS and shift it to a defined contribution plan, transferring billions in Wisconsininvestment earnings to the Wall Street banks and investment houses that destroyedour economy and the retirement security of the millions of American workers whowere shifted to defined contribution plans over the last 20 years.Lightbourn’s group published the study showing that the average worker earning$48,000 may be eligible to receive a monthly pension of $1,712. The same studyshowed that, in contrast, a private sector worker who earned $70,000 would getapproximately $1,300 a month in retirement. Lightbourn noted that the economicdownturn has reduced private sector pensions and that public employee pensionsare somehow unfairly insulated from the recession. Like Walker, Lightbourn arguesthat all public sector workers ought to pay more of pension costs, and that stateand local governments should use the savings to offset budget deficits. The observations of the WPRI called attention to a crisis in the lack of retirementsecurity for many, if not most, American workers. Attacking the WRS misses thepoint. ETF Secretary Stella noted that there is a retirement crisis in this country,“but it’s not a crisis of having too much income…it’s so disappointing to see theWPRI advocate for slashing benefits for the men and women who protect ourcommunities, teach our children, and serve the public in so many different waysrather than offering solutions to make sure retirement security is achievable by all.We ought to be talking about improving retirement security for everyone inWisconsin rather than reducing it for some.” We could not agree more. AFSCME,along with other unions, supports enhancing retirement security for all workers.Lightbourn and Walker disregard the fact that any effort to reduce the employer-paid cost of the WRS would have to be negotiated at the bargaining table, wherethe principle of quid pro quo holds. It is worth noting that candidate Walker hasstated publicly that he would look at any legal option he had to force unionizedworkers to pay for their benefits if they refused to negotiate. Harsh words.

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