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Sunday, October 14, 2012

PSPRS: broke or broken promise

For PSPRS members, calculating one's pension is easy: take the average of your high three (or five) years of salary and multiply it by a percentage between 50-80% based on your years of service.  This amount is the annual retirement you will receive for the rest of your life.  However, the simplicity of this calculation belies the more complex system inside PSPRS where actuaries use mathematical models to project costs into the future and financial professionals have to make critical decision about where to invest funds in order to meet those cost projections.

The danger for PSPRS members is to simply think of the promise that is implied in their retirement calculation and not the mathematical and financial reality behind it.  The attempts to reform PSPRS are often portrayed as a breach of faith by government, despite the fact that Arizona's public employers have fulfilled their obligations to PSPRS and all other state pensions.  Unlike some public employers in other states, Arizona has not delayed or withheld funding to PSPRS or tried to hide its obligations in pension bonds, so the breach of faith explanation does not hold water.

The financial problems of PSPRS and other public pension are often portrayed as a broken promise since this idea is easier to sell instead of the reality that PSPRS has to survive in the same world as IRA's, 457(b) accounts, Social Security, and every other investment account.  PSPRS does not exist separately in its own financial realm where the only problem is legislators reducing funding or benefits.  Amity Shlaes addresses this situation very starkly in her September 28, 2012 article (Election won't prevent pension crash).

If it was financial self-delusion to think that dot.com companies could enrich investors without earnings or that home prices could rise indefinitely, then it is equally dangerous for PSPRS members to think their pension is isolated from market forces, common sense, or arithmetic.  Anyone who tells members that PSPRS' financial problems are only about broken promises is setting them up for disaster.

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