The Public Employees’ Retirement Association (PERA) in Colorado is facing financial difficulties that could lead to another round of benefit cuts and contribution hikes for state pension members within the next two years. A recent study by benefits consulting firm Segal revealed that PERA has been underestimating some of its future debts due to outdated demographic assumptions. According to state law, PERA must stay on a path to full funding by 2048.
If the pension diverges from this path, automatic cuts to retiree cost-of-living raises and increases in contributions from public workers and their employers will be triggered. Brad Ramirez, an actuary with Segal, said, “It seems likely to happen.”
PERA’s finances depend on actuarial assumptions, including a 7.25% rate of return target on investments and demographic factors like member lifespans. Despite substantial investment gains in recent years, PERA’s finances remain unstable due to larger-than-expected pay increases for public employees and higher mortality rates among retirees due to the pandemic.
Pension impact on Colorado public employees
If the auto-adjust provisions are triggered, retiree cost-of-living raises would decrease from 1% to 0.75% annually, and public employees and employers would see a 0.5% increase in paycheck contributions. Currently, most public employees contribute 11% of their salaries to PERA, with school districts and state government contributing an additional 21%.
PERA anticipates slower growth in school district employment due to declining birth rates. The pension’s unfunded debt has increased by nearly $800 million in 2023 alone, driven by pay raises for public employees in a tight labor market and new collective bargaining agreements. Monthly retirement benefits for PERA members are based on the length of service and highest salaries earned during public sector employment.
The recent study’s findings have raised concerns among state pension members who may face changes to their expected benefits in the near future.