The Truth about the Missouri State Employees’ Retirement System
For more than fifty years, the Missouri State Employees’ Retirement System (MOSERS)
has provided career employees with modest, but meaningful, retirement benefits through a
defined benefit pension plan. MOSERS covers more than 100,000 active employees and retirees
as well as their beneficiaries. Most state employees are covered by the Missouri State
Employees’ Plan (MSEP), which is administered by MOSERS. The average salary for the nearly
50,000 “regular” MSEP members is $35,041. Current members do not contribute to the plan,
but employees hired on or after January 1, 2011 will contribute four percent of pay – one of a
number of changes made for new hires.
MOSERS Efficiently Provides Career Employees with Modest, but Meaningful, Benefits
For retirees who receive benefits from MSEP, the average annual benefit was $15,374 in
2009 (MOSERS 2009 Annual Report). As part of the formula used in calculating benefits,
defined benefit plans use a service credit multiplier. For most employees, MOSERS uses a
service credit multiplier of 1.7 percent; far less than the national average of 1.95 percent for
state employees. For example, the benefit for a hypothetical 25-year MOSERS participant with a
final average salary of $40,000 would be calculated in the following manner:
$40,000 x 25 years of service x service credit multiplier of 1.7 percent = $17,000
In other words, using an average multiplier for a similarly situated state employee
elsewhere would result in an annual benefit of about $19,500. The service credit multiplier,
however, is only part of the formula: the most important variable is an employee’s final average
salary. According to recent data from the United States Bureau of the Census, the $38,557
average salary for a Missouri state employee ranked 49th in the nation and trailed the national
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average by nearly $12,000, 2007 State Government Employment and Payroll, U.S. Bureau of the
Census. Looked at another way, a 25-year state employee with a final average salary of $51,315
who participates in a typical retirement system would earn an annual pension benefit of
$24,887; forty-six percent higher than the benefit for a Missouri state employee. MOSERS
participants who retire under the “Rule of 80” are eligible for a supplemental temporary benefit
until age 62. The average retirement age for MOSERS participants is 60.3 years, however, so
that additional benefit would only be in effect for a year or two. The bottom line is that the
formula used to calculate pension benefits for Missouri state employees is inferior to the
formula used by a typical state retirement system.
Current members are eligible for full retirement benefits at age 62 with at least five
years service, age 60 with 15 years service, or at any age after 30 years of service. Many public
sector plans also maintain provisions such as MOSERS’ “Rule of 80,” under which employees
can retire when their age combined with years of service equals 80. The ability to retire at a
younger age is consistent with other public sector plans, and is sound policy because many
public sector jobs are physically and emotionally demanding, and those who hold those
positions are often directly responsible for public safety and health. Nevertheless, Missouri
enacted legislation in 2010 that will increase the normal retirement age to 67 for employees
hired as of January 1, 2011. Nor will new hires be eligible to retire under the Rule of 80; their
combined age and service must equal 90 for full retirement benefits.
Furthermore, the vesting period for new employees will be ten years; double the five
years for current employees. This means that, after reaching the required years of service, a
plan participant has the right to ultimately receive a pension benefit regardless of whether the
employee remains a member of the pension plan. According to the Wisconsin Legislative
Council’s 2008 Comprehensive Study of Major Public Employee Retirement Systems, nearly
three-quarters of the plans surveyed require five or fewer years of service to vest; private
sector plans also provide vesting after five years.
Because participating employers can calculate each employee’s benefit, employers can
efficiently manage the workforce. On the other hand, 401(k) plan participants may invest too
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little, or their investments may provide insufficient returns, thus preventing employees from
retiring. A recent calculation done by the Center for Retirement Research for Retirement USA
shows that the real retirement crisis in our country is the $6.6 trillion gap between current
savings and what Americans should have today to maintain their standards of living in
retirement (The Retirement Income Deficit, Retirement USA, October 2010). As a result,
millions of U.S. workers have already delayed, or are likely to delay, their retirement dates. This
can complicate the employer’s role, forcing decisions with unpleasant consequences for
everyone. Even for those employees who have accrued what they believe may be sufficient
savings, there is often little incentive to retire.
Defined benefit plans have access to professional investment managers who are trained
in developing ongoing, long-term investment strategies that include an optimum mix of growth
potential and risk. Participants and taxpayers benefit from the favorable investment
performance of pooled pension fund assets. The wide range of investment options open to
large pension plans, such as foreign and domestic stocks and bonds, real estate mortgages and
equities, and venture capital, also improve investment returns. Furthermore, MOSERS’
investments are not affected by the retirement timing of a particular employee so the
investment horizon never has to be shortened. As a result, return prospects are enhanced.
Executive Director Gary Findlay recently said, “The MOSERS investment portfolio has
admirably withstood a financial tsunami and is very well positioned to produce positive
performance as economic conditions improve.” MOSERS’ investment returns for 5-, 10- and
15-, year periods ended June 30, 2009 outperformed 85 percent of other public pension plans.
It should come as no surprise that the 2008 market downturn adversely impacted all
investors. What is surprising is that some individuals fail to account for the fact that defined
benefit plan funding is structured to be carried out indefinitely. MOSERS is designed for the long
haul and does not have an investment horizon like defined contribution savings plans that cover
individual employees. As a prime example, in 2009 investors who stayed the course enjoyed
one of the best market runs in history. MOSERS’ investments earned over $1 billion in calendar
year 2009; a return of 18.5 percent.
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Plan investments not only help keep costs down for plan sponsors, but are also a critical
part of the economic fabric of the state. According to the National Institute on Retirement
Security, each dollar in taxpayer contributions to Missouri’s state and local pension plans
supports $6.92 in long-term economic activity in the state. Ninety percent of MOSERS benefits
go to retirees who call Missouri home. Retiree expenditures stemming from state and local
pension plan benefits support nearly 28,000 jobs in Missouri. These figures reflect the fact that
taxpayer contributions are, in the long run, a highly efficient source of financing for retirement
benefits that ultimately provide income and jobs for others (Pensionomics: Measuring the
Economic Impact of State and Local Pension Plans, National Institute on Retirement Security,
February 2009).
MOSERS is Financially Sound
There have been some recent claims that public employee retirement systems across
the country are facing a financial crisis. These claims are rarely true, and they are not true of
MOSERS. As of June 30, 2009 MOSERS held net assets of about $7 billion. Based on the
actuarial value of those assets, MOSERS had a funded ratio of 83 percent. According to a recent
survey by the Center for State and Local Government Excellence the national average for large
public sector plans was 78 percent as of June 30, 2009. Most experts recommend a pension
plan maintain a funding ratio of 80 percent or higher. MOSERS has been funded at a level of
between 79 and 97 percent since 1989. A plan’s funding ratio is simply a comparison of assets
to accrued pension obligations. A retirement system’s liabilities are amortized over time –
similar to paying off a mortgage. In other words, a plan’s funding status is a snapshot that
captures a government’s ongoing effort at one point in time to fund its future pension liability. If
a state is consistently making its annual required contribution, its pension plan can have a
funded ratio below 100 percent yet still be on track toward full actuarial funding. MOSERS’
funding ratio compares very favorably to the funding ratio of other state plans in the region:
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System
Tennessee CRS
Missouri MOSERS
Iowa PERS
Arkansas PERS
Oklahoma PERS
Kansas PERS
Kentucky ERS
Illinois SERS
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Funding Ratio1
91%
83
81
78
67
64
47
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Source: The Funding of State and Local Pension Plans, Center for State and Local
Government Excellence, April 2010. Fund balances as of June 30, 2009.
Traditional pension plans like MOSERS have proven to be the most efficient way to
provide employees with sufficient and secure income upon retirement. MSEP has a normal cost
(the cost for current benefit accruals) of 8.77 percent of payroll but because of unfunded
accrued obligations the state’s annual required contribution is 12.7 percent in FY 2010 and 13.8
percent in FY 2011. Pension liabilities in mature, ongoing plans typically vary little from year to
year and MOSERS contribution rate historically has been in the range of 12 to 13 percent of
payroll. National Institute on Retirement Security, February 2009). State and local government
employer pension costs for all public pension plans in Missouri amounted to just over three
percent of all state and local government spending in 2008 (Issue Brief: State and Local
Government Spending on Public Employee Retirement Systems, National Association of State
Retirement Administrators, January 2011).
As is the case in most public sector plans, the bulk of revenues used to pay benefits
come in the form of returns on investments, therefore it is crucial for plan sponsors to
consistently make the annual required contribution to the pension plan. To show the
importance of making contributions on a timely basis, one can compare MSEP’s obligation to
that of the Judicial Plan. MSEP provides benefits to 103,953 individuals; the Judicial Plan covers
905. The state did not begin to prefund the Judicial Plan until 1999 so that Plan now requires a
contribution equal to 60 percent of payroll.
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Fiscal
Year
MSEP
Funded
Level
1999
2000
2001
2002
2003
2004
2005
2006
2007
2008
2009
2010
2011
89
93
97
96
91
85
85
85
87
86
83
n/a
n/a
MSEP
MSEP $
contribution contribution
(% of
payroll)
12.6
$197.9
11.9
202.3
11.6
215.8
11.6
209.5
8.8
156.6
9.4
164.7
10.6
194.5
12.6
226.3
12.8
239.5
12.8
249.8
12.5
252.1
12.8
n/a
13.8
n/a
Judicial
Plan
Funded
Level
3
6
9
12
13
14
15
17
19
21
22
n/a
n/a
Judicial Plan
contribution
(% of
payroll)
51.8
53.9
55.3
55.3
52.2
51.7
54.5
55.8
58.5
58.6
60.1
58.5
60.0
Judicial Plan
$
contribution
(millions)
$17.9
19.9
22.5
22.1
20.8
20.6
21.9
22.4
23.7
26.2
27.7
n/a
n/a
Current funding of DB plans actually reduces long-term costs over time through the
compounding of contributions and interest earnings. To a large extent, investment returns
dictate the level of contributions needed to keep pension plans funded at healthy levels because
those returns provide about two-thirds of plan revenues which provide retirement benefits.
Actuarial projections assume that over the long-term, MOSERS will earn 8.5 percent on its
investments. In some years returns will be below that rate and in others returns will exceed it.
Over the past 25 years, MOSERS has successfully met its 8.5 percent annual return target, 2010
MOSERS Spring Retiree News report.
AFSCME believes in a society of opportunity where all workers not only earn a living
wage, but can afford to see a doctor when they are sick. AFSCME believes we all should have
the opportunity to reach our full potential in our chosen careers and to retire with dignity
when our work is done. For decades, MOSERS has provided workers and their beneficiaries
with secure retirement benefits. There is no reason to believe it will not continue to be able to
do so.
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