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Sunday, March 01, 2009

Ring Them Bells

Of warning. As predicted here months ago and discussed here for at least 4 years, the shoe may be about to drop. This article from today's Boregonian tells the story. You don't need to read between the lines. It is pretty much all there except for making it official. The assumed rate of 8% appears to be on its last legs. In future posts we will discuss more fully the impact this would have on members and future retirees. To be fair, we will also discuss the impact on employers. This is not a done deal, but the article reveals a great deal about the plans, especially when we have members of the OIC and the PERS actuary interviewed.

10 comments:

ked said...

Well "jim-dandy".......I retired 5 years ago this January, and thus far have received one COLA!!! It's a good thing I can start drawing my social security in October..........That is if it's still there!!

mrfearless47 said...

As a retiree, you have nothing to worry about. It is current members - active and inactive Tier 1 and Tier 2 - that have cause for concern. They will be the ones affected by this potential change.

glf said...

Is there a table that can be used to determine the impact of using an assumed rate of 6% or 7% rather than the current 8% for a given age, account balance and payment option for Tier 1 money match?

mrfearless47 said...

Because of the way the "assumed rate" is interwoven throughout the PERS system, it would be impossible to craft a table to see how changes would affect individuals. We're talking about earnings rate as well as actuarial factors. The actuarial factors themselves depend on dozens of factors including mortality and group of employees by age (i.e. P&F, general service).

Wish it were easier to formulate but even I can't figure out all the pieces of this equation.

Bill R said...

The Oregonian article mentions the PERS board's regularly scheduled meeting last week. The PERS web site schedule does not show this meeting. How would we find out about these meetings? Any idea what the process is for making the change and when a change would become effective?

mrfearless47 said...

The meeting referenced in the article was the Oregon Investment Council, not the PERS Board. The Oregonian summary is about the only thing reliably available. The next PERB meeting is May 29.

patrick said...

I read the article carefully 2 times. I saw only references to changing the investment mix, the overall strategy... I can easily imagine that they would like to reduce the guaranteed 8% but really, I don't see it even hinted at in that article....

mrfearless47 said...

The key sentence is here:

"If the council dials back its level of risk in the pension portfolio, it likely would mean targeting a lower rate of return, which is the key actuarial assumption in the system."

This is a point I've been trying to make to people for four years. It is only a matter of time before this "key actuarial assumption" == rate guarantee will change.

This is obvious to me, but it may not be obvious to others. The actuarial assumptions made for earnings is the "assumed actuarial rate of return", which affects how much the employer contribution is (lower rate equals higher payments and conversely), how the actuarial tables (the payment formulae at retirement) are constructed, and the earnings guarantee for Tier 1 regular account balances.

patrick said...

Ok, but It seems to me that there are two numbers out there... One is the guaranteed 8% return for Tier 1 balances year over year. The other is the number the investment managers decide to shoot for. I mean, they could say, let's invest in such a way that we are shooting for 11%. or it could be 6%. I believe the article is talking about that number, not the 8%. I will grant you that if the market stays at the level it is now for the next 3 years, there will be legislators screaming to eliminate the tier 1 rate guarantee altogether. And of course they could do it. Which is why I have been considering taking my piddling Tier 1 balance (I am turnong 60 this year) as a lump sum and managing it myself.... but until they do the unthinkable in Salem, I figure the 8% return is hard to beat.... Anyway... I do enjoy your blog... very informative... keep up the good work.

mrfearless47 said...

Patrick:

You are missing the point. The actuarial rate is the SAME as the rate guarantee. They are linked together in statute and mean exactly the same thing.

As for taking away the Tier 1 rate guarantee, the courts have already ruled that the Legislature CANNOT do it, and it can't be done by the referendum process (Ballot Measure 8). The ONLY thing that could be done would be to lower the rate that is guaranteed, but that would require lowering the actuarial rate of return which increases employer contributions, change actuarial tables, etc.

If you are Tier 1 and vested and over 55, you are eligible to take out not only your "piddling" sum, but also 100% of its match and manage the sum yourself. With a lowered rate of return you might be able to match the PERS fund's guarantee (whatever that is), but you'd have to do it consistently without much volatility.