This week we got some good news. PERA is more efficient and costs less than other retirement plans! The Colorado State Auditor’s Office released an independent report that examined Colorado PERA’s retirement plan design and compared it to alternative public and private sector retirement savings options. The Auditor’s office teamed up with Gabriel, Roeder, Smith & Company (GRS), an independent, national actuarial firm to conduct its analysis. You can read the entire report here.
Below are the key findings from the executive summary of the study:
- Retirement income as a percent of final income, or replacement ratio, is a common metric used to compare one retirement plan to another. Target adequacy replacement ratios range from 77% to 85% of pre-retirement final pay.
- Alternative plans implemented for new hires require greater contributions in order to replace the same retirement income than the current PERA Hybrid Plan. If contributions are kept the same, alternative plans will provide a lower retirement benefit/replacement ratio. Alternative plans studied included defined contribution, cash balance, a combination of defined benefit and defined contribution, plus Social Security private sector model plans.
- Transition costs for moving new hires to an alternative plan would emerge in three main pieces: (1) the acceleration of the payoff of the unfunded accrued liability, (2) the higher cost of the new plan, and (3) the changing risk profile and investment earnings of the trust.
It is important to note that the State cannot eliminate the unfunded liability by moving new hires to an alternative plan and could cost the State anywhere between $8 billion and nearly $16 billion to convert to one of the other plans this study analyzed. The study demonstrates the advantages of PERA for employees including teachers who leave the system after just a few years, but allow their funds to remain within PERA to grow and be taken out upon retirement.
This study validates what we already knew. The independent firm could not find any plan that provides a more effective level of benefits than Colorado PERA proving that it is the best bang for the buck when it comes to retirement plans.