Puerto Rico pension cuts hang in balance
Ramón Merced retired in 2012 after working for nearly 30 years for the Metropolitan Bus Authority. He went through an early retirement window and is receiving about $1,090 every two weeks. Shortly after retiring, he realized that the money was not enough to live comfortably in Puerto Rico. So, he opted to buy land in the town of Moción in the Dominican Republic, where his wife is from, and eventually built a house there.
Merced said that in the Dominican Republic, he pays the equivalent of about $20 for electricity and a little more than $250 a month on a mortgage. He has his children in Puerto Rico and does not rule out moving back to the commonwealth but says proposed cuts in pensions will make that nearly impossible. “If they cut my pension, I will still get by in the Dominican Republic, but it is out of the question to move back to Puerto Rico because of the high cost of rent, food and utilities,” he told Caribbean Business.
Retirement plan participants, like other unsecured claimholders, face a reduction in the amounts paid to them by the commonwealth, according to the recently certified government fiscal plan.
A 10 percent average reduction in pensions “is appropriate and necessary. The goal is a balanced approach to restore fiscal health to Puerto Rico while ensuring that cuts to retirement benefits occur in a progressive manner that protects any retiree from falling into poverty. The level of cuts to pension benefits is also in line with reductions in other government systems facing pension funding crises,” the fiscal plan says.
Although the average benefit reduction will be 10 percent, there will be no reduction for those with combined retirement plan and Social Security benefits below the poverty level of $1,000 per month, the plan says.
Former Judge Miguel J. Fabre, a member of the committee of retirees in the government’s Title III bankruptcy process, says the cut is not needed because the government, in the past, has already reduced benefits. He warned that cutting public pensions will lead to emigration and hinder the local economy. “The profile of the local retiree is different from those in the mainland U.S. because many [in Puerto Rico] are still supporting families,” he said.
Even Oversight Board chairman José Carrión said, in response to a question from a reporter, that he could not live with a monthly pension of $1,000. “Not on my lifestyle,” he said.
There are currently about 167,800 retirees in Puerto Rico.
According to a 2009 study completed by the government, most retirees are between the ages of 60 and 80, but there is a percentage between 55 and 60 because of early retirement windows offered by the government.
About 75 percent of retirees at the time had a second source of income, which for 67 percent was social security and, for 10 percent, their spouses’ income. About 33 percent of retirees receive less than $1,000 a month from their pension. About 23 percent have a monthly pension ranging from $1,001 to $1,500.
The Puerto Rico government operates three public employee pension systems: The Employees’ (ERS), Teachers’ (TRS) and Judicial (JRS) retirement systems. The plans have different tiers of benefit formulas, some of which are traditional defined-benefit pensions based upon years of service and final salary, while others are hybrid cash-balance plans. Under the hybrid cash-balance plans, employees have notional accounts credited with contributions and interest, and upon retirement, benefits are payable as an annuity. Different benefit tiers apply to employees based upon the year in which they were hired.
According to the latest data available, each system has billions in liabilities. The ERS, which covers 245,000 employees, including 120,000 active employees and 125,000 retirees, has $1.7 billion in annual benefits and $38 billion in total actuarial liability. The TRS, which covers 80,000 persons divided between 38,000 active employees and 42,000 retirees, provides $800 million in annual benefits and has $18 billion in total actuarial liabilities. On the other hand, the JRS, which covers 860 individuals, divided between 370 active employees and 490 retirees and other beneficiaries, has $28 million in annual benefits and $700 million in total actuarial liability.
How did we get here?
Over many decades, successive governments have failed to adequately fund these retirement plans, and today the ERS, TRS and JRS are nearly insolvent.
The 1975 Tobin report predicted the collapse of the retirement system and urged the government to ensure its proper financing. However, for decades, the government and public employees have not contributed the necessary amounts to cover the cost of pensions payable to retired public employees and those who are about to retire. As a result, the Public Employees System has the lowest ratio of assets to liabilities of all government employee retirement systems in the United States.
In 2017, the government transitioned the retirement system into a “pay as you go” system in which the general fund pays out benefits.
The Public Workers Retirement System has two pension-plan rates. The first is the defined-benefits plan, which is divided into two benefit structures. The first consists of benefits provided through Act 447 of 1951 and covers participants who began to work for the government before 1990. The second structure is guided by Act 1 of 1990 and covers individuals who began to work for the government between 1990 and 1999.
Then there is the defined-contribution plan, known as the “2000 Reform,” which covers workers who began to contribute into the system after 2000.
Workers who have benefits under Act 447 can retire with an annuity that is the equivalent of 1.5 percent of their average salary for their first 20 years of service and 2 percent of their average salary for the remaining years. The percentage is computed using the highest salary as the base. The minimum retirement age for this group is 58. The individual can retire with at least 10 years of service and the minimum pension is $400 a month.
Public workers who fall under Act 1 have the right to receive the equivalent of 1.5 percent in annuity of their average salary for the past five years of service. The minimum age for retirement is 65 and the minimum monthly pension is $400.
Employees who accrue retirement under the 2000 Reform do not receive a defined benefit. They have the right to receive the money they have contributed to their pension during their life in public service, plus the yield of that contribution. The minimum age for retirement is 60.
From the start, the system did not have the needed contributions to maintain its solvency. To make matters worse, a series of laws were enacted between 1960 and the present that weakened the finances of the retirement systems. The laws increased benefits for employees but did not increase contributions nor did the government contribute the amounts suggested by actuarial reports.