The Wisconsin Retirement System (WRS), which covers 577,988 current and retired public employees across the state, is in great shape and is in no need of reforms.
This was the overall finding of the long-anticipated “Study of the Wisconsin Retirement System,” which was released July 1.
The new report re-discovered what previous studies had indicated before, namely, “The Wisconsin Retirement System is an efficient and sustainable retirement system” that “is insulated from large swings in annual contribution rates or funding levels due to the plan’s cost- sharing and risk-sharing features.”
Among the other re-discovered facts, the report noted that WRS funding has remained steady over the last 20 years and all current and future retirement payouts are funded at nearly 100 percent.
While there is a theoretical risk to taxpayers under the plan, the system operates on a “disciplined funding model and risk-sharing mechanism” that minimizes any potential taxpayer burden. This includes a mechanism for decreasing benefits and increasing contributions, and a long-term “smoothing” model, to balance out any wild variations in the fund, such as occurred as a result of the economic crash in 2008.
The study specifically looked at—and rejected—two alternatives to the current system. One, a “defined contribution” (DC) plan would be like a 401(k) system, whereby public employees would pay in a set amount but would not be guaranteed a specific amount upon retirement. Under the WRS’s “defined benefit” plan, employees pay in a variable amount but are assured a minimal benefit level upon retirement.
The other alternative under consideration was to allow employees to “opt out” of the state system and invest their retirement funds as they choose.
The new report makes the following recommendation:
“Given the current financial health and unique risk-sharing features of the WRS, neither an optional DC plan nor an opt- out of employee contributions should be implemented in Wisconsin at this time.”
“Analyses included in this study from actuaries, legal experts, financial experts, and information from similar studies conducted in other states show that there are significant issues for both study items in terms of the actual benefit provided and potential for negative effects on administrative costs, funding, long term investment strategy, contribution rates, and individual benefits.”
Why Another Study?
This latest study was required under Act 32, passed by the Legislature and signed by Governor Scott Walker last year. The bill specifically asked researchers to examine the possibilities of switching to a 401(k)-type alternative and the option allowing state and local workers to stop paying into the system.
State Representative Pat Strachota jumped the gun and introduced a bill last session that would have allowed some new hires to opt out of the WRS and pay into a new private retirement plan. The bill went nowhere, and the new report should make it a dead letter, but she told a local paper recently that she has not ruled out reintroducing it.
Still unwilling to take “it’s a bad idea” for an answer, Walker and his Department of Administration Secretary Mike Huebsch issued separate statements acknowledging the findings but making it clear they will still push for “reforms.”
“The state will continue to look at potential options for reforming the current system because the work force of the future may not look like our current work force,” Huebsch said in his statement. “Taxpayers deserve to have the best and hardest-working employees, and a 21st century work force may prefer portability of benefits and freedom offered by other retirement options.”
“I want to be very clear: I am currently not planning to make any substantial changes to the WRS,” Walker said in his statement. “However, I will continue to work to ensure that the WRS is fiscally sustainable for both taxpayers and retirees.”
Low benefits
One report finding you won’t see acknowledged by Walker and his co- thinkers is that benefit levels for Wisconsin retirees are lower than with most comparable major public sector plans.
Most defined benefit systems, including the one in Wisconsin, use a formula that considers years of service, wage level and age at retirement to determine the amount of monthly cash payments. Part of that formula is a “multiplier” that, after all other factors are considered, effectively adjusts the result up or down to come up with the final monthly payment to retirees.
The new study noted that the WRS multiplier is 1.6 while the average multiplier in similar systems across the country is 1.95. In other words, the average retiree in other public employee systems gets an additional 35 percent in benefits compared to their Wisconsin counterparts.
Why Bother?
It should seem obvious to all that the current WRS is working well and can be counted on to be working well into the indefinite future. We didn’t need yet another study to prove it. So, why are Walker and members of the Legislature so bent on destroying it?
One answer is that it’s working. Over a half million state and local public employees can count on the system for some measure of retirement security. And “free market thinkers” hate that. Especially since it’s a program provided by government. Better, they would say, to have older workers fending for themselves, or perhaps provided for by family members.
Without a WRS and Social Security, millions of older people would continue to work until they couldn’t work any longer, out of sheer necessity. The competition of more desperately poor people, scrambling for any job at any wage and under any condition, would keep wages and benefit costs down. And, of course, lower labor costs translate into higher profits for the employing class.
Another answer is that a privatized retirement system, where thousands of individuals must invest their retirement nest egg as best they can, would create enormous income for the “financial sector.” This in a couple of ways. The billions that would have gone into the widely-diversified portfolio that is managed by the WRS would likely end up in mutual funds and the stock market, pushing up the selling price of already overpriced equities.
And, of course, the “equity managers” and their employers would all get a take off the top as would be retirees sell, buy and resell stocks.
A stable, well-managed system like the WRS is, frankly, bad for business.
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