Florida has been a top retirement destination for decades, so it’s a bit ironic the state that’s renowned for its ability to attract retirees is severely mismanaging its own retirement system
Pension benefits have been promised to nearly 1.2 million active and retired teachers and government workers.
In 2008, the Florida Retirement System had a $6.6 billion surplus and boasted a funded ratio of 105 percent, well above the recommended 100 percent-funded mark.
Today, the Florida Retirement System is $29.8 billion in debt and has just 84 percent of the funding it needs to pay for retirement benefits.
One reason the pension system has dipped so far into the red are overly optimistic investment return assumptions. Currently, the plan assumes it will earn a 7.4 percent rate of return on its investments, a rate that was firmly rejected by the independent actuaries the state hired.
Economic models developed by Milliman Inc. and Aon Hewitt found all financial forecasting “models developed in 2018 indicated a likelihood of 35 percent or less of actual long-term future average returns meeting or exceeding 7.40 percent.”
This is bad news for workers and taxpayers. Despite the stock market’s strong performance, investment returns for the Florida Retirement System have failed to meet expectations in four of the last 10 years.
The pension system is funded by the contributions made by employees and employers, plus its investment income, so whenever investment returns do not meet the plan’s predictions, unfunded liabilities and debt rise.
Ultimately, to make up for the shortfall, contributions from public workers have to increase, the government via taxpayers can increase its contributions to the system or the state can try to divert funding that was intended for other programs, including schools, roads, and public safety.
In the long run, rising pension debt can often crowd out important public programs.
The debt and unfunded liabilities are just one of Florida’s retirement problems though. So in 2000, the Florida Legislature prudently decided to offer an additional retirement plan to new hires called the FRS Investment Plan, a portable, defined-contribution retirement plan similar 401(k) retirement plans.
Unfortunately, Florida’s Investment Plan has been woefully underfunded according to industry standards. Employees contribute 3 percent of their salary and the state, as the employer, contributes 3.3 percent for a combined contribution of 6.3 percent of the employee’s salary, which falls far below the 10 percent to 15 percent annual contribution rate that financial planning professionals say is needed to generate sufficient retirement income.
Dangerously inadequate contributions could lead retirees, who may have a false sense of financial security, into insolvency during their most vulnerable retirement years.
Florida is setting itself up for a retirement crisis of its own making.
This column originally appeared in the Florida Times-Union.