Wednesday, July 18, 2018

More needed than cutting pensions by 10% to save Puerto Rico retirement systems

By on March 15, 2017

SAN JUAN — A 10% cut to pensions of more than $2,000 a month from the teachers’, central government and judiciary retirement systems, as proposed by the newly certified fiscal plan, would only guarantee payment of one additional month of benefits and pensions by each system.

This means that, even with this change, the teachers’ and central government’s systems would run out of funds in early 2018, while the judiciary could pay its benefits only until early 2019, the systems’ administrators acknowledged during a joint public hearing by the Senate’s Government and Treasury committees, which are investigating the three pension systems. (Senate Resolutions 12 and 93)

Armando Rivera, executive director of the Teachers Retirement System, explained that a 10% reduction in pensions of more than $2,000 would affect 10,434 retired teachers out of the 43,068 in the system, which is currently fed by the contributions of 35,209 active teachers. Monetarily speaking, the teachers’ system would stop paying $26 million a year in benefits, when “the system has $32 million a month in obligations.”

Armando Rivera, executive director of the Teachers Retirement System, said that "no modification of the benefits of active participants will prevent the insolvency of the system." (Cindy Burgos / CB)

Armando Rivera, executive director of the Teachers Retirement System, said that “no modification of the benefits of active participants will prevent the insolvency of the system.” (Cindy Burgos / CB)

Rivera said only one pension in the system is of more than $6,000. It is received by Víctor Fajardo, a former secretary of Education who was convicted for corruption. He gets $6,444 a month.

Meanwhile, the interim administrator of the government employee and judiciary retirement systems, Natalia Palmer, estimated that the 10% cut would affect 11,436 of the 122,363 retirees and beneficiaries of the central government’s system, which represents about $37.3 million less annually in pension payments. The system draws from the contributions of more than 200 employers—agencies, public corporations and municipalities—and 118,664 public employees.

In the case of the judiciary, 324 of the more than 390 pensioners would be affected, which represents about $4 million less in annual benefits. The majority—174 retirees, or 45%—of the pensioners in the judiciary receive $5,000 to $6,000 a month, and six receive more than $10,000 a month.

The situation for the three systems has worsened amid the government’s failure to provide additional funds through special laws.

It is expected that the government will develop, alongside the fiscal control board, strategies to correct deficiencies in the retirement systems during the next 30 days, following certification of the fiscal plan, which occurred Monday. These measures would be in addition to the 10% cut to pension payments that are greater than $2,000.

These strategies include the possible conversion of pension systems to the “pay as you go” mechanism, whereby the government assumes responsibility for all retirement systems and pays according to available funds. Public-private alliances in various government components are also expect, since Act 1 of 2017 established that some of the generated revenue would be directed to the retirement systems.

Changing Teacher Benefits Won’t Prevent Insolvency

The precariousness of the teachers’ retirement system is such that “no revision of active participants’ benefits will prevent the insolvency of the system. Even if all pension benefits are eliminated for active participants, [the system] will run out of assets for fiscal year 2019,” Rivera said.

If the government doesn’t inject enough general fund money— “$400 [million] to $500 million” annually—to correct the deficit of teacher retirement system payments before 2019, “pensioners are exposed to a cut of up to 45% to benefits”. This would be “disastrous for teachers,” the system’s executive director said.

The official stressed that, since the system was created in 1917, it was not allowed to “mature,” since it immediately began with the payment of pensions.

The lack of a proportional ratio between employees’ contribution and the pensions they receive; the government’s debts to the system; the increase in life expectancy; and the fact that the number of pensioners exceeds active teachers contributing to the system have worsened its situation.

“The governor will say what his plan is for [the teachers’ retirement system] later, but he will fulfill his commitment to pay pensions,” Rivera said.

For her part, the chairwoman of the Senate Finance Committee, Migdalia Padilla, said that the information provided in testimony is sufficient to determine how to improve the situation of the systems, either through legislation or through executive orders.

The senator hopes that part of the government’s debts to the systems will be included in the budget, which will begin to be evaluated April 30, the deadline given by the fiscal control board to the government for the budget’s delivery.

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