PERA Contributions Went Up – Where Does That Money Go?

November 6, 2019

Have you looked at your paycheck recently? You might have noticed that the amount you contribute to PERA from each paycheck changed in July. Before July, you contributed 8%. But now you contribute 8.75%. In the next couple of years, that number will change again. So where do those extra dollars go?

A brief history of your future

If you’re in the PERA Defined Benefit Plan, you’ll receive a pension for the rest of your life once you retire. That means PERA sends you a paycheck every month, even if you live long enough to become the oldest person on record (currently the record stands at 122 years, 164 days).

To pay for that lifetime retirement paycheck, you contribute money while you’re working. The money you contribute goes directly to your PERA account. You can log in to your PERA account any time and see exactly how much you’ve contributed, down to the cent. It earns interest (currently 3%, compounded annually) until you retire.

Your employer also sends money to PERA. Those employer dollars go to what PERA calls divisional trust funds. PERA’s investment team invests those dollars and, over time, turns them into even more dollars (in total, these funds currently contain tens of billions of dollars).

Fast forward to retirement when PERA starts sending you checks. Where does PERA get that money from? When you first retire, that money comes from your personal PERA account. You basically start withdrawing those savings you built up at PERA during your career. But that doesn’t last forever. By the time most PERA retirees reach year five or six in retirement, they have already received back all the money they ever contributed to PERA.

So you retire at 65, and you’ve used all the cash in your account by age 71. Problem? No. PERA keeps sending checks, but for the rest of your life the dollars you get come from those divisional trust funds mentioned above. Even if you live to be 122 years and 165 days old.

So that’s how PERA works. Great. But what does that have to do with the change on your paycheck? A lot.

Back to today

Let’s say you’re not retiring today, but instead years down the line. You probably want PERA to be working not just now, but at that later time, too, right? If retirement is a few decades away, then PERA needs to make a few educated guesses about what the world is going to be like in 2050 so we can make a plan to get there. If retirees receive a benefit as long as they’re alive, then PERA needs to project how long people will live on average. Second, if PERA is counting on using earnings from investments to pay retirees, then we need to estimate how those investments will do over the next 30 years.

It’s not exactly easy to make those guesses, but PERA has been around since 1931, so there’s a pretty good track record. Part of the reason PERA has been successful is that it revisits those projections periodically and makes adjustments. The world changes and PERA must too.

One change PERA noticed recently is that retirees are living longer. Great news! But more people living longer also means more dollars are needed overall (PERA pays for life, remember?). Another change is that the PERA Board thought it would be wise to be more conservative when estimating how the markets will perform in the future. PERA is still planning on making money, but the estimate was lowered by 0.25% per year. That might not seem like a ton, but over 30 years it means less money generated from investments. To make up the difference, the state legislature decided contributions will go up, among a few other changes.

So to answer the original question—where do those increased contributions go?—your additional contributions go directly to…you! Every dollar in additional contributions go directly to your member account. You can see those additional dollars hit your account every time you get paid. By chipping in more to our accounts while we’re working, we’ll be able to pay ourselves back for a bit longer at the front end of retirement.

The year 2050 might seem far away. A lot can happen between now and then. One thing that you can count on is a secure retirement. Ensuring PERA is on track to be there for 123-year-old you is priority number one.