Agreement to limit Puerto Rico worker pension cuts nears
Fiscal board agrees ‘in principle’ with retiree committee deal
SAN JUAN — Puerto Rico’s Financial Oversight and Management Board (FOMB) has “agreed in principle” with an offer made by the Official Committee of Retired (COR) government employees, which seeks to minimize the impact on pensions in the island’s bankruptcy-like process under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (Promesa).
“I would not say it is a done deal but we are very, very close,” a source close to the negotiations between COR and the fiscal board told Caribbean Business.
If implemented, the commonwealth’s fiscal plan, which was certified May 9, could result in an up to 25% cut to the pensions of the island’s 167,000 retirees, most of whom make less than $2,000 a month.
Although the average benefit reduction will be 10%, according to the fiscal plan, retirees with total retirement plan benefits—including assumed Social Security of $400 for non-police Employee Retirement System (ERS) members for whom the employer pays Social Security taxes—who fall below the poverty level of $1,000 a month, will not have their pensions cut.
“This formula is equivalent to giving each beneficiary a reduction of 25% in the monthly benefits they receive in excess of $600 or $1,000,” the plan states.
The dollar figures will be adjusted in future years consistent with increases in the federal poverty threshold. Under the approach, about 36% of retirees would see no reduction to their benefits but an additional 22% will have their pensions reduced by up to 5%. Therefore, approximately 80% of retirees will see reductions of 10% or less, and more than 90% will experience a benefit reduction of 15% or less.
“Very few retirees will have more than a 20% reduction, and none will have a reduction of 25% or more. For 2019 Fiscal Plan entities only, the effect of the reform would be 33% of retirees with no reduction, and 24% with less than 5% reduction,” the fiscal plan reads.
However, all the fiscal plan lays out is slated to change, the COR source said. The proposed tentative agreement, which is revealed in a letter COR sent to retirees, calls for protecting 61% of current retirees from experiencing further reductions in their monthly pensions, an increase from the 25% proposed by the fiscal board in its October fiscal plan and in its May plan.
“This means that over 102,000 retirees would be protected from cuts under our proposed agreement – over 60,000 more retirees than would be protected under the FOMB’s plan. On an aggregate basis, approximately 74% of all active employees and retirees holding accrued benefits would be completely protected,” the letter reads.
The deal also guarantees Social Security benefits would not be affected.
“This means they will not take into account what the retiree gets in Social Security to calculate the pension,” the source said.
The agreement would also ensure that monthly contributions toward medical insurance benefits would not be affected. Those retirees who would be subject to cuts would experience significantly smaller reductions versus the certified fiscal plan, which calls for individual cuts of up to 25%.
More importantly, the deal would assure that retirees are protected against any future attempts to cut accrued pension benefits.
The source said the board only recently agreed in principle with the offer made by COR.
On May 17, the board issued a statement saying it did not want to cut pensions and saying its pension reform was the right path because it would reduce the cost of pensions by $10 billion over the coming years.