Pensions 101: The Nuts and Bolts of PERA's Defined Benefit Plan

January 16, 2018

Ah, the blog we all (or at least we) have been waiting for: A look at Colorado PERA’s defined benefit plan, the lifetime retirement benefit for more than 560,000 current and former public employees throughout Colorado.

In our last blog, we provided an overview of what a defined benefit plan (also known as a “pension plan”) actually is. So, now that you’re armed with the basics, let’s dive into what Colorado PERA’s plan looks like in particular. After all, if you work in the public sector here in Colorado, chances are high that you have access to PERA’s defined benefit plan through your employer…and wouldn’t it be nice to better understand that which will likely fund a significant portion of your retirement? And if you don’t have access to PERA’s defined benefit plan through your current employer…well, here’s what you’re missing (sorry!).

The Colorado Public Employees’ Retirement Association (PERA) was established by the Colorado state legislature in 1931 at the request of a group of state employees who foresaw the need for a safe and secure retirement system (you’ll recall from the first blog in this series that there was widespread adoption of public pensions by state and local governments around this time—thanks in large part to the Federal Employees Retirement Act in 1920). Currently, PERA has 207,000 active employees across more than 580 public employers who contribute to the fund, including:

  • Employees of the State of Colorado
  • Employees of all school districts throughout the state
  • Judges in the Colorado judicial system
  • Employees of many municipalities, special districts, public health departments, and other local government entities

Both employees and employers share the cost of funding PERA’s benefits, each paying in a percentage of their PERA-includable salary (think of it as PERA’s version of “taxable income”). Since PERA is a substitute for Social Security, employees don’t contribute to Social Security while working for a PERA employer. Instead, that tax-deferred percentage of pay we just mentioned (currently set at 8% for most employees in the system) goes into PERA’s retirement trust funds.

OK, so members of PERA contribute a portion of each paycheck for as long as they’re employed by a PERA employer. That seems like a lot, though; what do they get in return?

They actually get a lot back. Remember when we broke down the meaning of a defined benefit plan in our previous blog? Well, by way of being a DB plan, PERA provides its retiring members a monthly income for the rest of their lives. The amount of that monthly income takes into account a number of variables—including the member’s highest average salary, number of years worked, and age—but regardless of the end result, the basic fact remains: If you’re a PERA member, you’ll receive a monthly check until the day you die.

It’s a pretty sweet deal, but there’s a common misconception that you have to stay with your employer for a loooong time in order to see any sort of benefit. That may have been the case for your grandpa’s pension, but the hybrid nature of PERA’s plan design makes it a top-notch option for even the “flightiest” of millennials.

You can read more about the ways PERA benefits short-term employees here and here, but we’ll leave you with this: every PERA member receives more money than he or she puts in—regardless of length of employment. 

Not too shabby, eh?