Keeping the VRS Debate Honest
Arguments made by those seeking changes to the Virginia Retirement System (VRS) are often based on misinformation. Gov. McDonnell was the most recent example when Politifact examined his statements on VRS and gave him the grade of “flaming pants.”
The fight to preserve the defined-benefit (DB) pension plan we now have is going to be challenge for state and local employees in the session ahead. But the fight will at least be fair if we dispel widely held misconceptions and keep it honest. This battle is not about the budget – it is about ideology. Those promoting a defined-contribution (DC) option for VRS ignore the flaws of their own logic.
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Here are some key facts that should be considered if we are to have an honest debate of the important issue.
DC proponents say that we have to go to a DC plan because we have an unfunded liability.
Switching to a Defined Contribution plan does not reduce the unfunded liability of the Commonwealth – it increases is. The Fiscal Impact Statement for HB2410, which would have created a a DC plan for state and local employees, in the 2011 session explained, “As fewer new hires join the current DB plan, the payroll base under this plan would begin to decline immediately. Since the payroll base is used to fund the DB system’s unfunded accrued liabilities (UAL), the financial burden as a percent of payroll will increase.”
DC proponents say that DB plans have been totally eliminated in the private sector.
It is not true that the private sector has done away with defined benefit plans. Of the Fortune 1,000 firms, 586 have some kind of DB plan. Industries that routinely offer DB plans include aerospace and defense, utilities, food and beverage, manufacturing, automobile and transportation equipment, natural resources, energy, wholesale, insurance and financial services. Please follow this link to more information on this topic.
DC proponents say that the pension is underfunded because public employees are greedy and the benefits are generous, and they conclude that the state cannot afford the pension plan.
The reasons VRS is underfunded are twofold. The Great Recession hit investment markets hard, and the General Assembly has failed to put the amount recommended by VRS (the VRS Board of Trustees certified rate) into the teacher fund in sixteen of the last twenty years.
The average annual benefit for a retired teacher is $20,814 (Information obtained from the June 30, 2010 VRS Actuarial Valuation). An educator who works for 30 years receives a benefit equal to 51% of their salary. This is hardly greedy, and when we compare this benefit to the benefits offered in other states it is not generous.
The Boston College Center for Retirement and Research says that 1.65% of Virginia’s budget goes to funding VRS. The average allocation among states is 3.80%. Virginia can afford VRS.
DC proponents say that the sky is falling and that we must act quickly to address the problem.
The actuarial window for the unfunded liability of approximately $17 billion is 85 years.
In 2007 the VRS Fund reached its high water mark of $58.3 billion. The value of the fund sank to $38.9 billion in March of 2009. As of July 11th the funds value had risen to $55 billion – recovering most of the losses.
Paying the VRS Board of Trustees certified contribution rate into the fund in the years ahead would correct the problem!
DC proponents say that having employees pay into the fund will reduce the unfunded liability.
Having employees pay the “employee share” does not increase the amount going into the fund, it just changes who is paying – shifting the burden onto the employee and reducing employee compensation in a time when many employees have gone years without a raise.
The history of this issue is that all employees once paid the “employee share” of 5%. Years back (the year varies by locality) employees were told, “We are not giving you a raise, but we will pay the 5% for you.” Further, employees were told that this decision was irrevocable. So, for employees, asking them to now pay the 5% is asking them to give back a raise they earned years ago.
State employees now pay the 5%. They received a 5% raise to offset the loss, but some saw small decreases in take-home-pay, a consequence to tax factors. Most local employees do not pay the 5%.
Be careful about the public statements you hear about VRS. VEA can provide you with the facts about your pension system and ways you can fight to keep it strong.