Overview
There has been an alarming rate of growth in recent decades in the required, taxpayer-funded employer contributions to Georgia’s two major retirement systems, the Employees’ Retirement System (ERS) and the Teachers Retirement System (TRS). Gloomy market forecasts for the next decade and a looming threat of a major recession suggest that this growth is likely to continue.
In the aftermath of the Great Recession, state lawmakers made major changes to ERS to gradually reduce the levels of risk it places on state budgets. Similar reforms are needed for TRS, and it is time again to examine some ongoing challenges for ERS. Serious reform should consider the long-term solvency of the plan, ensure the ability to recruit employees and protect the promised benefits for employees already in the system. The benefits in a public employee retirement system should properly balance financial risk. They should provide retirement security for all current and future members as well as retirees, and at a cost that is predictable and affordable to taxpayers.
The best pension reforms emerge from collaborative efforts involving a broad cross-section of stakeholders in a process that examines a system’s flaws, explores and analyzes all possible methods of reform, and achieves consensus on a package that meets these principles.
Recommendations
Reduce the risk of the plan assets and adopt a lower assumed rate of return
Evolving market volatility increases taxpayer risk for institutional investing. Lower assumed rates will influence more realistic expectations about returns on assets.
Adopt a new discount rate practice
A new rate practice should base the discount rate on a measure of the risk of plan liabilities (since the discount rate is intended to value liabilities) instead of being based on a measure of the risk of plan assets (the status quo approach).
Establish shorter pension debt payment schedules
Paying down unfunded pension liabilities faster will reduce long-term interest costs through the reduction of unnecessary and expensive interest on unfunded liabilities.
Explore alternative retirement plans for new teachers
Newly hired teachers need optional plans that offer portability, balance risk and better address the retirement security needs for short-term employees. These options include hybrid plans, cash balance pensions, defined contribution retirement plans, and “choice” plans potentially combining some of the above options.
Replace retiree health benefits
New benefits systems should include up-front, annual contributions to employees’ Health Savings Accounts.