Generous LA pension system for most now hurts a few

Unfortunately, the chickens continue to come home to roost as the consequences of Louisiana’s over-generous retirement system, as a segment of retirees in the state’s two largest suffer at the hands of a system that directed too much money to those encouraged to work too little.

At Senate interim committee hearings the latest statistics revealed that in the Louisiana State Employees Retirement System some 18 percent, and in the Teachers’ Retirement System of Louisiana 39 percent, of retirees received monthly benefits that were below the poverty level for a two-person household. The few cost of living increases to retirees that have come about in the past several years have not matched general price inflation.

The numbers at first glance seem unsettling, but overstate the problem of large numbers of retirees living hand-to-mouth. First, some in both systems worked for the state as only one career, and have either a private pension, something like an IRA, or Social Security benefits coming their way as well. Second, some were part-timers, which in part explains why the TRSL figure is so much higher, a portion of which are part of households with another member either still employed or with a retirement from a full-time job. Third, even for those who worked in either system full time, some will have another household member either employed or also with retirement income. Fourth, these households get a small break in that they are exempt from state income taxes. Finally, many of these may be single households.

Taking all of this into account means the households actually living in poverty who draw a LASERS or TRSL retirement check is much smaller. And another reason why the TRSL proportion is much higher is because it includes food service workers (although some may draw Social Security benefits as well; other TRSL and LASERS members when employed by the state do not pay into Social Security) who typically had the lowest salaries. Still, that even a small portion of over 100,000 retirees may be living in poverty represents an issue the state should address in some cases.

Of course, some retirees may have made inferior choices to put themselves in that situation. In many job classifications, retirement at full pay could occur after 30 years service, and in some even fewer. For most, pensions could be drawn after 55 regardless of whether they had put in the maximum number of years. By permitting such early retirement ages after relatively few years of service potentially, the state created disincentives for them to work longer and thereby build up assets and perhaps future benefits, and shares equally to blame for their plight. Workers also may have decided poorly in depending only on a state pension as their sole source of retirement income, although in a minority of cases after only spending on genuine needs some will have little money left over to sock away in a retirement vehicle such as home ownership or investments.

Yet the state, more specifically the boards that govern LASERS and TRSL, also must take additional discredit because of the con game they ran with contributors and taxpayers. For many years they successfully argued to have an assumed rate of return of 8.25 percent (just lowered to 8 percent for LASERS) on their investments when for the last decade and more it has run significantly below that on average. By having an artificially high rate, this hid the true costs of pensioning that would have to be made up by one or both of contributors and/or taxpayers and has led to unfunded accrued liabilities of these systems now approaching $20 billion. More solvent systems would make it legally easier to grant cost-of-living adjustments for retirees.

Finally, the retired contributors themselves were allowed to underpay the state for the generosity of the benefits they would receive, which comparatively are significantly better than what workers get in the private sector that do jobs with the same kinds of tasks. It’s hard to fault them because of the incentives the state gave them; in its members’ handbook, for example, it brags how “Social Security benefits are generally only 40 percent of your average salary, while TRSL retirement benefits are typically 60-75 percent” and with an example of a “57-year-old single teacher retires after 30 years of working with an average salary of $28,800 …. The TRSL benefit the teacher paid $50,000 for is worth more than $335,000!” (and subsequently points out this is state tax free as well). Such numbers should sensitize taxpayers that too much was promised for too little, and that this led to the abysmal UAL that acts as an anchor preventing assistance to retirees who are paying now by little in the way of COLAs for their underpayment during their working careers.

Thus, a proper solution recognizes some increase should be granted to those retirees who made state employment a full-time career and who worked for a full productive period. Legislation could grant those who got service credit up to 75 percent of the maximum and who worked at least past their earliest eligible retirement age an increase, with a sliding scale of a miniscule raise for those who worked barely past their classification’s retirement age at with 75 percent service credit, with the maximum for those who worked at least until 67 and got 100 percent service credit. Not only will this reward those who wished to be productive as long as possible, it also will parse out those who likely have other retirement incomes from their own doings or in their household’s.

Covering everybody in both systems would cost an extra $162 million annually for every percentage point raise from two systems that aren’t much more funded than at half of the level they should be. Doing so with these qualifications and only for those just above and below the poverty line for a one-person household, can lower dramatically this cost to a small fraction of the computation and actually might make such a plan affordable and feasible.