A regular Source feature, Undercurrents explores issues, ideas and events as they develop beneath the surface in the Virgin Islands community.
A steady drumbeat of warnings about the government’s retirement system is getting louder and louder, but so far territory leaders have done little more than sway to the music.
A year ago, the Pension Reform Taskforce recommended several changes – all aimed at increasing contributions and decreasing benefits – but to date none have made it into law.
“The question is will it survive without major reforms,” said Austin Nibbs, administrator of the Government Employees Retirement System. His own prediction is that, without reform, the system will collapse in about nine years.
Does the Legislature have the will to implement such unpopular recommendations as increasing the retirement age?
“Well, it’s an election year, so I (will) say no more,” Nibbs responded.
GERS officials have been cautioning for decades that the system is under stress, complaining each time the Legislature passed another bill doling out extra benefits to one or another group of constituents. In 2011 a V.I. inspector general’s audit concluded the system was headed to insolvency, and the taskforce was created in response to the audit.
A chart contained in the taskforce report traces the steady decline in the health of the system’s contributions-to-benefits ratio. In 1994, total contributions are listed as $61.7 million, and benefits and expenses at $46.7 million.
The next year, 1995, is the last time that contributions outweighed benefits and expenses. In 1996, the system took in $71.7 million and paid out $73.3 million, and the difference has continued to rise.
By 2012, the deficit had reached $138.3 million, with contributions at $105.4 million and benefits and expenses at $243.7 million.
GERS has had a generally good track record in its investments. Since 1981, Nibbs said, it has generated an average return of 9.2 percent. Recent years have been even better, with a 12 percent return in 2012 and 15.6 percent in 2013. Its actuary advises the minimum it should receive is 7.5 percent. “Anything over that is gravy,” he said.
Such healthy performance has allowed the system it to make up the difference between contributions and benefits, and perhaps, (unintentionally) to mask the seriousness of the problem from the casual observer. But investment earnings are not meant to subsidize benefits and GERS can’t continue to tap them.
In the past, “Waste could be covered up,” said GERS trustee Edgar Ross. “Now you can’t tolerate waste in the system … Right now we’re starting to go into the core of the assets; we’re taking out more than we’re earning. … We can’t invest ourselves out of the problem.”
Some critics argue that the system was always out of balance and that “unfunded mandates” from the Legislature have only exacerbated the problem.
Several executive and legislative moves over the years to reduce the workforce by encouraging early retirement have led to savings in government payroll, but these measures increased the payout required from GERS.
By 2012, after the latest set of layoffs engendered by the V.I. Economic Stability Act of 2011, the active members of GERS stood at 9,093, compared to 8,256 retirees and beneficiaries, an unhealthy ratio of 1.1 to 1.
There have also been a number of special interest pieces of legislation over the years, giving extra retirement benefits to one or another group of workers.
Some of these mandates have included appropriations to GERS to offset the cost, but retirement officials say the appropriations generally fall very short of the real cost.
In general, benefits under the system are “extremely generous,” Nibbs said.
A full service retirement annuity is 75 percent of the retiree’s average salary – 100 percent if he worked for 40 years. And, unlike some other government pension plans, the retiree is also entitled to social security.
According to the taskforce report, the average monthly pay out in 2012 was $2,248 – exclusive of social security.
The taskforce recommendations wouldn’t change the rate of pensions, but they would delay the start of benefits.
Currently a regular employee can retire at age 60 with just 10 years of service, or at any age if he has 30 years of service. A hazardous duty employee can retire at any age after 20 years of service or at age 55 with 10 years of service.
The taskforce would eliminate the “any age” provisions in both categories and also increase the retirement age. In order to retire, a regular employee would need to be at least 62 years of age with 10 years of service, and a hazardous duty employee would need to be at least 55 years of age with 25 years of service, or age 60 with 10 years of service.
Currently most government employees contribute 8 percent to the system and the government, 17.5 percent. The taskforce suggests increasing the employer contribution by 2 percent and the employee contribution by 1 percent, temporarily. It describes two alternatives, both of which limit the increases to seven years or less. It recommends using rum excise tax receipts to fund the increase in the government contribution.
Senators and judges – both of which groups can retire early – would also have to contribute more for their pensions under the recommendations: between 15 percent and 17 percent for judges, who now contribute 11 percent, and 15 percent for senators.
Now senators can retire at age 50 if they have at least six years of credited service in the government or they can retire at any age if they have six credited years in the Legislature.
Judges can receive an annuity equal to 30 percent of their salary if they have served one term on the bench and up to 90 percent for three terms.
The GERS board has already implemented a recommendation that didn’t require legislation. The board has suspended the cost of living adjustment. Nibbs said the COLA cost the system between $3 million and $4 million annually. The taskforce recommended revisiting the issue after five years, but Nibbs said the board’s action was to suspend it indefinitely.
The taskforce also recommended raising the limits on loans to GERS members, eliminating double dipping by retired employees rehired by the government, and raising the salary cap for benefits from $65,000 to $110,000.
