Gov’t proposes benefit cuts to avoid pension system collapse

Written by  //  February 28, 2013  //  Government  //  No comments

The Puerto Rico Commonwealth Retirement System has a $35.2 billion actuarial deficit and its assets will run out in Fiscal 2014 without a reform. (Credit: © Mauricio Pascual)

The Puerto Rico Commonwealth Retirement System has a $35.2 billion actuarial deficit and its assets will run out in Fiscal 2014 without a reform. (Credit: © Mauricio Pascual)

High-ranking Puerto Rico government officials unveiled Wednesday a package of measures aimed at resolving the Commonwealth Retirement System’s critical fiscal situation, including raising the retirement age and increasing employee contributions.

During a late afternoon press conference, Government Development Bank President Javier Ferrer and Treasury Secretary Melba Acosta shared the task of unveiling reform details that also call for cutting a number of benefits retirees receive on top of their monthly check.

The measures, they said, “are necessary so that together, they can significantly reduce the System’s cash flow deficit that threatens to leave no funds in the near future.”

The Puerto Rico Commonwealth Retirement System has a $35.2 billion actuarial deficit and its assets will run out in Fiscal 2014 without a reform, the GDB chief said.

“A healthy actuarial coverage should provide .80¢ for every $1 in benefits. The average in mainland states is .63¢, Puerto Rico has .06¢ for every dollar,” Ferrer added.

If approved by the Legislature, Laws 447 and Law 1 that currently define retirement benefits for about 116,658 retired employees and 131,361 active Puerto Rico government workers who are contributing toward their retirement would be amended to reflect the new conditions.

The proposal
Public employees would be migrated from the defined benefits plan established by Law 447 and law 1 to a hybrid plan with an additional defined component. he agency will apply a benefit freeze on public employees currently active under defined benefit plans under Law 447 and Law 1, by eliminating new benefit accrual under the current Retirement System, but respecting all of the accrual the employees have recorded so far.

Upon retirement, employees will receive a pension equivalent to what they have accrued through June 30, 2013 under Law 447 or Law 1, coupled with an annuity corresponding to the contributions they make starting June 1, 2013. Merit pensions under Law 447 will be eliminated. Merit pensions would be eliminated.

The reform proposes increasing retirement ages depending on the law that shelters the employees; Law 447 participants, from 58 to 65 years of age; Law 1 beneficiaries, from 65 to 67; Reform 2000 employees from 60 to 67; Police and Fire Department employees from 50 to 58, plus 30 years of service.

Reform 2000 is a defined contribution plan where employees contribute a percentage of their salary to their savings account with the government, and the system in turn contributes a percentage equal to the proceeds of System investments or a fixed rate, as chosen by the participant. If the participant leaves their job, they are paid a lump sum at that time.

With the government’s proposed changes, Reform 2000 participants would instead get a fixed annual lifetime payment, Ferrer explained.

The package also calls for increased employee contributions to the system, from 8.275 percent to 10 percent.

Perhaps the most significant change is associated with a proposed modification of benefits obtained through Special Laws approved over time related to Christmas bonuses and medical coverage that cost the government $200 million a year. The cuts vary depending on the individual’s monthly income.

Treasury Secretary Melba Acosta (Credit: © Mauricio Pascual)

Treasury Secretary Melba Acosta (Credit: © Mauricio Pascual)

Treasury’s Acosta explained that retirees receiving a monthly pension check of $1,500 or less — or about 80 percent of the universe — would see a 30 percent reduction in the Christmas bonus to $425 from $600, a reduction by half of the government’s additional health plan contribution (to a maximum of $600 per year), an elimination of the $100 “summer bonus,” and a 25% increase in a medicines bonus to $125.

Retirees receiving more than $1,500 a month, which represent about 20 percent of the group, the changes are as follow: 66 percent reduction in the Christmas bonus to $200 from $600; eliminating the government’s additional health plan contribution; an elimination of the $100 “summer bonus;” and eliminating the medicines bonus.

Future retirees would not be eligible for any of the fringe benefits, which will be eliminated completely.

“Many of the problems the Retirement Systems are facing date to increases in the benefit structure that have been made in the past, without identifying the resources required to meet the cost of these increases,” said Ferrer. “We granted additional benefits (through special laws and pension credits) through the years without providing the resources to pay.”

‘Sensible and reasonable reform’
Despite all of the proposed cutbacks and changes, Acosta said the reform “seeks to be sensitive to those retirees whose economic reality makes them more vulnerable to changes in the system and public employees who are near retirement age.”

Changes designed to soften the impact on more vulnerable public employees are:

  1. Increasing the minimum pension of $400 to $500.
  2. Use some of the savings resulting from changes to the special laws — estimated at about $100 million — to provide more generous benefits to those pensioners who receive less monthly.
  3. Implement the retirement age increase in steps to lessen the impact of the reform on those who are closest to the current retirement age.
  4. And the conversion of the benefit to Reform 2000 beneficiaries from a one-time payment to lifetime income.

“This way we seeks to find a reasonable balance between the system’s fiscal crisis and the economic and social reality of our retirees and our most disadvantaged public employees,” said Acosta.

Despite the proposed changes, the reform will not be enough to cover the system’s cash flow requirements, for which the government will have to contribute another $100 million annually to prevent the System from ever going broke.

retirement chart

Despite the proposed changes, the reform will not be enough to cover the system’s cash flow requirements, for which the government will have to contribute another $100 million annually to prevent the System from going broke.

Acosta said there are two options being studied to address that: identify a specific funding source and assign it to the Retirement System, or include the charge as part of the government’s General Fund obligations, which already contributes to the system.

During the news conference, Acosta said the agency is working on expanding Puerto Rico’s sales and use tax base to shore up more revenue than at present. That includes closing loopholes and eliminating exemptions from a list of about 40 that have been added since the tax was passed.

The package of measures will be submitted to the Legislature if not today, before the end of the week, for what sources have said will be a “fast-track” approval.

With that in hand, government officials will meet with credit ratings agencies with the expectation that it will be enough to avoid a downgrade of Puerto Rico’s credit to junk.