MADISON — Despite projections showing what could be the deepest benefit cuts yet for Wisconsin Retirement System pensioners, officials said Thursday they don’t recommend changes in the pension fund, which in recent years has emerged as the nation’s most solid.
System actuaries project possible cuts in payments of between 9 percent and 15 percent for thousands of retirees — if fund investments maintain their current healthy pace for the rest of the year.
“Some of the adjustments for 2013 look pretty grim,” Bob Conlin, secretary of the Department of Employee Trust Funds, told board members, many of whom are retirees. “I know that gave a lot of you heartburn. It gave a lot of us heartburn.”
An expected fifth straight year of benefit reductions is the result of investment losses suffered in the 2008 financial market meltdown.
The good news is that if the market doesn’t stumble badly in the next few months, the fund will have recovered from the worst effects of 2008 and retirees will be able to look forward to benefit increases in 2014, Conlin said.
Since the fund suffered a 26 percent investment loss in 2008, cuts in benefits have grown more severe, and they have focused more on the system’s oldest retirees. The pattern is dictated by state laws that spell out how investment gains are distributed in good years, and how losses are absorbed in bad.
School, municipal and state employees in the system retire with a guaranteed minimum benefit level — called their floor — which is determined by factors such as the number of years they worked and how much they earned.
Pension payment rates grow to higher levels when the previous year’s investment income allows. When there are losses, benefits are reduced. But they can drop no lower than the floor.
Because of the 2008 investment losses, those who retired since that year have never seen a benefit increase, although their floors are higher — the average is about $26,000 for those who retired in 2007 — than those who retired decades earlier when pay rates were lower.
Each time retiree benefit levels were reduced, more retirees were cut back to their floor, and a smaller pool of retirees was left to absorb the next year’s cuts.
If 2012 investment income — currently running at about 9 percent — doesn’t fall off drastically before year’s end, then in 2013 an average benefit cut of 11 percent will be absorbed by roughly 100,000 retirees who stopped working in 2004 or earlier. The 70,000 who retired after 2004 are already at their floors.
“You can see the real shrinking of the group these adjustments will apply to,” said Bob Willett, department controller.
The goal for annual investment income is 7.2 percent per year. In spite of many ups and downs in the last decade, on average, the target has been hit, said Michael Williamson, director of the State of Wisconsin Investment Board, which oversees investments.
How will things turn out this year or next year?
“The only thing I can tell you is it will continue to be a roller-coaster ride,” Williamson said.
If investments return the expected 7.2 percent in 2013, benefits will increase in 2014. If cuts are necessary, they would be spread out over only 61,000 who retired before 2000.
A 2.1 percent benefit cut in 2008 was the first in the system’s history. This year’s 7 percent reduction was the biggest ever.
The average retirement benefit in the system is about $23,000 annually. The average benefit floor for someone who retired in 1987 is about $8,500.
Retirees and department officials have looked for ways to avoid further cuts, but most changes would take action by the Legislature and would involve shifting the burden of investment losses from one group of retirees to another, said Steve Hurley, director of the department’s policy office.
Next spring, the board will examine financial data and advice from actuaries before setting benefit rates for the following 12 months.
After decades of increasing benefits, many retirees came to see the system as providing guaranteed cost of living increases, several board members said during Thursday’s meeting.
But that’s not the case, and the limits on benefit increases — and the painful decreases — are one reason why the system is fully funded, while others around the nation are struggling, said department Deputy Secretary Rob Marchant.
Retirees need to save in years when their benefits increase, said board member Michael Langyel.
“Rather than make a new system, we have to reiterate to everyone that this is a fixed benefit and really call on people to work with their financial advisors,” Langyel said.
Conlin said that after four years of benefit reductions, retirees have begun to hear the advice.
“Given the letters I get, they are hearing it,” Conlin said. “They just don’t like it very much.”