Without a strong rebound in the investment market, Wisconsin's public pension system may need a larger infusion of taxpayer money, further reductions in benefits for retirees — or both — to maintain the long-range stability of a fund considered one of the nation's strongest.

Meanwhile, some retirees are nervous about a special report due June 30 on possible changes that could shrink the pension pool by allowing employees to opt out or choose alternative plans.

With roots dating to the 1890s, today's Wisconsin pension system has several unusual features that have made it a national model at a time when many public retirement funds are in crisis and most private companies have abandoned guaranteed benefit plans for employees.

Still, the 2008 financial meltdown is testing the Wisconsin system, which guarantees a minimum benefit based on years worked and salary, with the possibility of increases — called dividends — when fund investment income is good. But investment losses triggered a series of unprecedented dividend reductions that have left the system mulling options with about half of retirees already at their minimum benefit level after 2012 cuts.

For state legislators, any changes to the nearly $82 billion pension fund would be politically touchy. Hundreds of thousands of public workers and retirees are counting on benefits, but state voters are sharply divided over government employee benefits in the wake of a series of hotly contested recall elections sparked by a rollback of union rights and cuts in pay for the public sector.

Many recession-weary taxpayers are wary of spending on pay and benefits for government employees. Tom Raymond, a pensionless private sector worker from Menasha, said he is sympathetic to his mother-in-law, a retired state employee whose pension benefit keeps dropping, but thinks pension costs should be cut.

"We're in a poor economy, and I don't think anybody proposing raising taxes is going to get very far," Raymond said. "I'm of the mindset that I'm responsible for my family."

While Wisconsin pension benefits — averaging about $23,000 per retiree annually — are comparable to other states, and investment income typically covers about 75 percent of costs, taxpayers here still contribute about $1.5 billion annually.

Public-sector workers and retirees worry that decades of promises about old-age security could be broken by lawmakers seeking favor with antigovernment voters, said Jim Palmer, who heads Wisconsin's statewide police union and is a director of a group that represents more than 170,000 retirees in the system.

The courts have long held that pension funds are the property of workers and retirees, and they can't be taken without compensation. But benefits could be changed for new hires, and other changes could affect the system's long-term stability.

"There are those who think they can score political points by appealing to that, in appearing strong in taking on public employees, failing to realize there are tremendous benefits to the state in having a good retirement system," Palmer said, adding pensions keep the elderly off welfare and stimulate local economies.

Rules changed last year

State government started paying the employee portion of annual contributions in 1984 in exchange for a pay freeze the year before. Local unions negotiated similar deals. Employers agreed in part because no Medicare or Social Security taxes are paid on pension contributions, but pay freezes eventually were lifted.

Gov. Scott Walker and the Legislature in 2011 ended the practice of employers picking up the employee portion. Total contributions equaled 11.8 percent of pay for most this year.

The new law also forbade pensions for new employees who work fewer than five years, and reduced pension payouts for state executives and elected officials.

It left in place most other laws that define how benefits are calculated and when workers can retire with full benefits — 57 years old with 30 years of service, or 65 years old otherwise.

Workers also can retire as early as age 55 with reduced benefits and no extra cost to the system.

Overall, 578,000 people participate in the retirement system, including the more than 170,000 retirees, 261,000 current public workers, and others no longer working for government but not yet drawing pensions. The system covers most teachers and public employees in Wisconsin.

Difficult decisions

Some of the tough choices that may now be facing Wisconsin result from the lingering challenges following the 2008 world market meltdown that have bedeviled weaker public employee pensions.

To avoid a fifth straight year of reduced benefits in Wisconsin, the fund needs an unusally high investment return of 27 percent to 31 percent in 2012, said Jon Kranz, employee trust department budget and finance director.

Other options to cope with an investment return below 27 percent include increasing contributions from the taxpayers and employees or eroding the fund's base.

Over the last 20 years, fund investments have met or exceeded its 7 percent return goal on average. But it suffered a 24 percent loss in 2008, which has meant an unprecedented series of benefits cuts in 2009 and each succeeding year. Next in line for reductions are those who retired in 2002 or earlier.

'The envy of the country'

In the run-up to this month's recalls, some union members sounded alarms, while the Republicans who control most of state government insisted no catastrophe was pending.

"I am currently not planning to make any changes to the Wisconsin Retirement System," Gov. Scott Walker said through a spokesman last week.

That hasn't quelled fears of public employees who saw Walker overturn 50-year-old union laws in 2011.

"I don't trust him," said Marty Beil, director of the state employees union. "He parses his words when it comes to the state pension system."

Beil and others worry that the special study of the system could lead to higher costs and destabilization of a fund if employees are allowed to stop making contributions in exchange for a smaller retirement benefit, or switch to 401(k) savings accounts.

The heads of the Legislature's Joint Finance Committee — Rep. Robin Vos, R-Rochester, and Sen. Alberta Darling, R-River Hills — declined to return phone calls and emails seeking their comments, but Rep. Patricia Strachota, R-West Bend, who sponsored a failed effort to provide a 401(k) option to university employees said she hopes her plan is revived.

State Sen. Glenn Grothman, R-West Bend, a member of the Senate labor committee, said he didn't anticipate changes.

"The state of Wisconsin retirement system is the envy of the country, and why would we change something that is the envy of the country?" Grothman said.

Democratic leaders did not respond to requests for comment.

Report due at end of month

The 2011 biennial budget calls for a broad review of the system's operations, including the possibility of allowing employees to opt out.

Walker-appointed representatives of the state Department of Administration and its Office of State Employment Relations have been meeting with policy officials from the state Department of Employee Trust Funds, which operates the pension system.

Representatives of the departments declined to describe the talks, identify participants or disclose possible recommendations.

A report is due to Walker and the budget committee June 30.

Diane Oakley, executive director of the National Institute on Retirement, said tinkering with a pension system can be beneficial, but changes must be studied carefully to prevent unintended consequences in finances and in government's ability to recruit employees.


Wisconsin fund stands out

Wisconsin's retirement system is unusual in several ways. It is one of a handful in the U.S. that is fully funded, meaning that it is rich enough to pay all the benefits state law has promised.

The state Department of Employee Trust Funds each year sets rates of employer and employee contributions to meet standards required in law — to ensure the fund has enough money to meet obligations, and to pay certain minimum benefits to retirees based on age, years worked and salary level. The money is invested, generating income that currently makes up about 75 percent of the fund.

Another unusual feature that contributes to the fund's solvency is that there are no guaranteed cost of living adjustments for retirees. When investment income is good, dividends are added. But benefits are rolled back in bad years.

In Wisconsin, managers also are required by law to give great deference to actuaries who figure out how much the employee and public employer should contribute each year to keep the funds solvent.


Wisconsin retirement system at a glance

Individual pension benefits are calculated to reflect an employee's length of service, salary, age and investment gains earned by the pension fund.

  • Average annual benefit: $23,000
  • Average retirement age: 60
  • Average retiree age: 70

Two-thirds of current retirees had from 10 to 35 years on the job.

Years of service 10-15 15-20 20-25 25-30 30-35
Average final pay $32,443 $39,179 $44,732 $50,220 $54,579
Number of retirees 15,738 17,113 18,400 22,036 32,120
Average annual benefit $9,384 $14,112 $20,448 $29,256 $37,572

The benefit is based on the higher of two calculations:

Formula: Average pay from last three years of employment times the number of years of service times 1.6 percent.

Annuity: Total amount contributed by employer and employee plus interest earned based on age at retirement.

Sources: Department of Employee Trust Funds, Legislative Fiscal Bureau


What's next?

State officials project the Wisconsin Retirement System will earn a 7.2 percent investment return this year, an amount that will allow the system to complete its recovery from losses suffered in the steep 2008 market decline.

Even so, the system projects benefit cuts of 12-16 percent for those who retired before 2003.

Benefits will be cut even more if the system falls short of the 7.2 percent target.

To avoid benefit cuts, gains of 27-31 percent are needed, officials said.

State laws spell out formulas that determine benefits and contributions that must be based on actuarial recommendations aimed at keeping the system fully funded while maintaining retirees' living standards. The benefit cuts since 2008 are unprecedented.

That's in contrast to some state systems, which pay out defined benefits no matter how their pension fund investments fare.

Two 2011 budget bills made five significant changes to rules on overall system funding and on benefits for certain participants, requiring difficult accounting adjustments to an already complex system.

On Thursday, actuaries will provide the Department of Employee Trust Funds board with a range of contributions rates that will be paid by government employers and employees next year, but the final annual recommendations usually made in June aren't expected until September this year, said budget and finance director Jon Kranz.

Contribution rates can't be set until the agency completes its accounting of how the law changes affected the $82 billion fund.

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