Pension Reform for the New Normal Economy—Examining Colorado’s Successful Model
29216924 © Reese Ferrier | Dreamstime.com

Policy Study

Pension Reform for the New Normal Economy—Examining Colorado’s Successful Model

Colorado's 2018 pension reforms put the state on track to have its public employee retirement system fully funded in 30 years.

Facing a real threat of pension insolvency, in 2018 Colorado lawmakers enacted major, bipartisan reform of the Public Employee Retirement Association (PERA) that provides retirement benefits to all state and school employees, along with many local employees. Colorado’s pension reform came at a time when the pension system had experienced decades of growing funding shortfalls and a deteriorating ability to provide promised benefits in full.

This analysis dives into the 2018 effort—a culmination of collaboration from several involved parties, including the Pension Integrity Project at Reason Foundation— which significantly increased annual contributions and established automatic annual adjustments to contributions and cost-of-living-adjustment benefits, among several other prudent adjustments to benefit eligibility and availability.

Now, with a few years of results beyond the pension reform, it is possible to use actuarial forecast modeling to evaluate the system’s trajectory before and after the major changes made in 2018. Mapping out results over the next 30 years under several different return scenarios shows that the system is, in fact, in an improved position for closing its funding gap.

The analysis also indicates that, where it was extremely vulnerable to unpredictable market shocks and long-term underperformance before, PERA is now much more prepared to withstand these possibilities.

With the application of the 2018 reforms, PERA’s School and State Divisions will reach full funding within the prescribed 30-year period, assuming actual market experience matches exactly the plan’s assumed annual return of 7.25 percent. Much of this improvement in system resiliency can be attributed to the automatic adjustment policy implemented in 2018.

While more improvements are still needed for the system in order to ensure resiliency and long-term financial sustainability, the 2018 reform steered Colorado’s pension system to a much better position for handling the still-unrealized outcomes of 2020.

Seeing the need for effective and lasting reform, and the importance of living up to retirement promises made to state workers, Colorado’s policymakers came together to pass pension reform that addressed many of PERA’s weaknesses. Now, just two years later, the value of this reform is becoming clearer.

Stakeholders in other states and cities should look to adopt similar policies, especially ones that involve automatic adjustments to both contributions and benefits. Policies like those adopted in Colorado can usher pensions into the modern era, a time in which plans need to be more reactive and resilient to an increasingly volatile and unpredictable market setting. Colorado policymakers should also consider continuing their effort to build a more secure PERA, as this would benefit state taxpayers and public employees alike.

Pension Reform for the New Normal Economy‚Examining Colorado’s Successful Model