Retired teachers in Missouri are learning a hard but simple math lesson: Longer life spans plus smaller investment returns equal no cost-of-living raise in their pensions for next year.
In dollars-and-cents terms, that means that the board of the state’s Public School Retirement System has voted that if inflation falls below 2 percent for 2016, which appears all but certain, school retirees will get no raise in their pensions.
The vote is expected to save the retirement fund $2.5 billion, according to Steve Yoakum, the executive director of the system. He knows that the change in the cost-of-living allowance (COLA) isn’t making retirees happy, but he said the system had no choice.
“It’s not that we’re going to run out of money,” Yoakum said. “It's just that we need to make sure that we don’t run out of money.
“We don't have a printing press. We don't have a money tree. So we're going to have to make some changes.”
Teachers unions in the state reacted to the vote with a grudging acceptance. But the Missouri Retired Teachers Association was much more negative and much more vocal.
“SHOCKED! STUNNED! DISAPPOINTED!” was the headline on a newsletter on the association website. Executive Director Jim Kreider lumped the decision in with other financial challenges retirees face.
“It disappoints us,” he said in an interview. “We think this is outrageous. We think the retirees have been thrown under the bus.
“Money shrinks over time. If you don't have a cost of living adjustment on there, pretty soon you're in poverty. We want to make sure that when you're 85 years old, you can pay your bills.”
The choices that the PSRS board was faced with, Yoakum said, grew out of a collision of two big changes in the world today.
“Number one,” he said, “people are living longer, and number two, the expected investment return for almost every asset class has gone down. That really came together for us in 2015-16 school year.”
Under the law, the PSRS board has flexibility to adjust the COLA paid to retirees to make up for any projected shortfall from increased longevity plus decreased investment.
It could have kept the old system, where the COLA was set at 2 percent when the cost of living rose between zero percent and 5 percent, or it could have opted to make the COLA the same as any inflation that measured up to 2 percent.
Instead, it chose a third option, of no COLA for inflation of up to 2 percent. The plan calls for a 2 percent COLA when inflation is between 2 percent and 5 percent, and a 5 percent COLA when inflation rises above 5 percent.
Yoakum said that by itself, the longer life span for retirees added $2 billion to the system. And anyone who studies investment returns these days knows that the 8 percent rate that PSRS has assumed and actually gained over the past 30 years is not likely to continue.
That assumed rate of return was lowered to 7.75 percent, which may be more realistic but still is expected to reduce the system’s balance by another $1.2 billion.
The conditions affecting the Missouri pension plan are far from unique. A recent survey in Governing magazine said major public pension plans nationwide are reporting “dismal investment returns,” with most earnings falling far short of the average target of 7.5 percent. So far, the report said, no major plan has reported preliminary returns of more than 1.5 percent.
In Missouri, Yoakum said, the trend line was clear.
“Roughly 63 percent of the benefit payment comes from the investment earnings,” he said. If you have to shrink that down and assume you're going to get less there, you're going to have to squeeze that balloon somewhere else, and the only other levels that you can pull are either a benefit adjustment or a contribution rate increases.”
That contribution rate is the other factor the PSRS board had to consider in any plan to shore up the system financially.
Right now, teachers and their school districts each contribute 14.5 percent of the teacher’s salary to the retirement fund. But Yoakum said analysis of the situation showed that keeping the contribution rate where it is and adjusting the COLA made the most financial sense.
Reaction from teachers, present and past
After the vote by the PSRS board in June, teachers unions in Missouri notified their members of the COLA change. The Missouri State Teachers Association put its reaction this way in an email to members: “One thing: the sky isn’t falling.”
It noted that the decision can be revisited if conditions change, and it added support for the change.
“The PSRS Trustees are faced with difficult decisions to ensure that your retirement system remains strong for the long-term,” the message said. “Most of us wouldn’t want the pressure and responsibility to make decisions affecting tens of thousands of active and retired members of PSRS. MSTA trusts the Board to make these tough calls and supports their recent decision.”
Similarly, the Missouri-National Education Association noted that a 2 percent COLA for each of the past five years resulted in a 10 percent increase for retirees even though inflation was less than that, so retirement policy can cut both ways.
It also noted that the restrictions could be lifted in the future.
“If investment returns are higher than expected because of an economic upturn,” the union said, “the Trustees could restore the COLA increase when the CPI is under 2 percent. We do not expect the mortality rate to decrease and are pleased that members are healthy enough to enjoy a longer life.”
But the group most directly affected, retired teachers, had a different point of view. MRTA’s Kreider noted that the teacher retirement system in Missouri is one of the best in the nation, and he wants to make sure it stays that way.
And, he added, the retirement system is one good method of making sure the state has good teachers in the classroom.
“We think educators deserve a decent retirement,” Kreider said. “We believe that their salaries weren't that great when they were teaching, but we feel that a good retirement system, a good retirement plan with a good cost of living adjustment is nothing but deferred compensation.
“We have something to protect, and we feel that this retirement system helps us recruit and retain the best teachers possible. It's not salaries that keep teachers in the classroom. It's commitment, and a decent retirement plan when they retire.”
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