Over the years, I have had many FRS members call and ask questions regarding their pensions. The most common question used to be, “Should I DROP”? Now however, the single most important question seems to be “Is my Pension secure?”, or “Will I get my pension”. Most of the conversation was started with the dramatic losses within the FRS investment holdings. The 2008-2009 financial crisis hacked some 25% off of the total assets in FRS. Tie that in with the drop in state revenues due to severely declining property taxes, and one of the worst unemployment rates in the country, and the need to cut costs is loud and clear.
In a conversation with a FRS participant the other day, she questioned why government entities were not fulfilling their pension obligations. FRS is underfunded by some 12%, and many local governments are in much worse shape, some underfunded by almost 50%. The problem is simple. Tax bases are down dramatically, so the Gov’t agencies flat out don’t have enough money to cover their costs, let alone the shortfalls created by the financial crisis. The only way to make up the difference is to either cut costs or increase income. Increasing income would mean raising taxes. In this economy, with 14% unemployment, and just about everybody in a financial pinch, raising taxes is probably not feasible. That leaves cutting costs!
Many of those government agencies are going to change from the traditional Pension Plan, whereby a retiree’s “benefit is defined”, to a “Defined Contribution” plan such as a 401k. In the Defined Contribution plan, the employee makes the bulk of the contribution into their retirement plan, and the employer makes a matching contribution. A typical plan calls for the employer to contribute one dollar for every two the employee puts in. Compare that with FRS’ current program where the employer makes 100% of the contribution, and it is pretty easy to see how it cuts costs dramatically.