In a previous post, I introduced PSERS and the looming problem of an underfunded pension plan. In this post I provide basic information about defined benefits pension plans and basic facts about PSERS.
PSERS is the pension fund for public school employees, covering Pennsylvania’s 499 school districts, 28 intermediate units, 14 community colleges, and 4 state-owned colleges, 169 charter schools, 64 technical schools, and several other units. The Pennsylvania Public School Employees Retirement Act was signed into law in 1917, taking effect on July 1, 1919. The Public School Employee Retirement Systems (PSERS) exists to provide retirement income and health insurance for retirees of the state’s public education system. (Full history and plenty of other info is here.)
PSERS is a defined benefit pension plan. To quote Wikipedia, “A defined benefit pension plan is a type of pension plan which an employer/sponsor promises a specified monthly benefit on retirement that is predetermined by a formula based on the employee’s earnings history, tenure of service and age, rather than depending directly on individual investment returns.” Although most public sector employees in the USA have defined benefit pension plans, only 35% of Fortune 1000 companies have active pension plans.
The great feature of pension plan is that the plan (rather than the individual) bears two key risks of retirement: low or negative investment returns, and outliving one’s retirement assets. With a traditional pension like PSERs, the employee is guaranteed a monthly income stream for life, even if the investment portfolio drops in value and even if the employee lives to the ripe old age of 100.
How does a generic pension plan work? The employee and employer contribute into the general fund during the employee’s working years. Those funds are invested (with all other contributions) by the advisors of the fund, earning a return. Once the employee retires, a benefit is paid every month based on the employee’s earnings, years of service, age, and other factors.
If all goes well, the contributions made are sufficient to fund the promised benefits. If there is a shortfall in funds, there are three ways to make up for it (we’ll come back to these in a future post):
- Earn more from the investment portfolio (take more risk)
- Raise contribution rates for those still working and contributing to the plan (employees and/or employers)
- Reduce benefits
As of June 2014, PSERS held $50B in assets. During the preceding 12 months, the plan took in $2.1B in contributions, earned $4.3B in investment income, and paid out $4.3B in benefits. About one-third of the contributions were from employees, and two-thirds of contributions were made by employers (schools).
As of 2013, PSERS had almost 600 thousand participants:
- 273,000 active members (paying in)
- 122,000 inactive members and vested members (neither contributing nor receiving benefits)
- 200,000 members receiving benefits (payout phase).
In UCFSD, we have approximately 700 active members (paying in) and 370 members receiving benefits. I’ll provide some interesting stats on both populations in a future post.