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Was it constitutional for Proposition 124 to replace PSPRS' permanent benefit increases with a capped 2% COLA?

In this blog I and multiple commenters have broached the subject of the suspect constitutionality of PSPRS' replacement of the old perma...

Thursday, August 9, 2012

You don't have to like it, you just have to pay it!

It is common knowledge that Social Security will eventually be unsustainable, and there will not be enough active workers to pay the taxes for those already drawing benefits.  However, there's nothing like rubbing this fact into the noses of those still working (Social Security not deal it once was for workers).

The idea that a retirement program should ever be a better "deal" for one group versus another is counter to all that  a retirement program is meant to do.  Fundamental to all retirement plans are the expectations that pooling of investments will maximize returns over the time, that an actual return on your investment (at a minimum over the rate of inflation) is delivered, and that there is a managed system in order to maintain sufficient funds to pay all participants in the plan.  If one group gains more at the expense of another group, this is simply a form of expropriation.  In the case of Social Security, it is a case of inter-generational theft.

Social Security has numerous problems, most significantly is that benefits are paid to current retirees from the taxes of current workers.  Social Security ran a surplus for many years in order to build up a reserve for future obligations, but this surplus was "invested" in US government securities.  This is the equivalent of one spouse lending the family retirement savings to the other spouse to pay all the monthly bills.  There is an obligation there, but in the end they will still have no money left in their retirement account.

PSPRS, fortunately, does not operate that way. PSPRS owns an actual pool of investments with measurable value.  These investments have an expected rate of return that should produce enough investment gains to pay everyone who participates.  However, there is some of the same unfairness going on in PSPRS as in Social Security.  PSPRS essentially has a three tier Deferred Retirement Option Plan (DROP):

  1. For those already in the DROP before 1/1/2012: they get a guaranteed interest rate (currently 7.85%) on their DROP money and do not pay any contributions to PSPRS.
  2. For those already hired before 1/1/2012 but without 20 years service: they get a minmum rate of 2% or the 5-year average actual rate of return of the system (currently 3.8%), whichever is higher.  They must continue to pay into the pension during their time in the DROP but will have these contributions returned with interest to them after they leave the DROP.
  3. For those hired on 1/1/2012 and later: No DROP at all. 
The final monetary payout between the first two tiers is probably small, but the third tier is definitely being given a raw deal.  To add insult to injury, they will be paying a higher contribution rate (currently 9.55% and topping out at 11.55% in two years) to PSPRS for probably their entire careers.  So not only are they being denied a significant benefit, they get to pay more out of every paycheck to make sure all those before them get it.

While it would be an exaggeration to call this expropriation since tier three members should still be get back much more than they pay into the system, this situration is very unfair and needs to be acknowledged as such.

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