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Este informe no está disponible en español. CARIBBEAN BUSINESS Danger: Commonwealth Employees Retirement System unfunded by as much as $11 billion Commonwealth Retirement System has the lowest funding ratio in U.S. By GEORGIANNE OCASIO TEISSONNIERE of Caribbean Business July 14, 2005 Can employees trust the government to provide for them in their old age? With the lowest funding ratio in the U.S., a substantial increase in beneficiaries as baby boomers begin retiring in large numbers, the prospect of more people collecting benefits than those paying into the system, and years of increasing benefits without having the necessary funding, the outlook appears grim for the Commonwealth of Puerto Rico Employee Retirement System Administration (ERS) unless drastic measures are put into action. With $11.191 billion in actuarial liabilities and only $1.947 billion in actuarial assets as of July 1, 2003, the system faces a deficit of $9.244 billion. Gov. Aníbal Acevedo Vilá’s transition team estimated in December 2004 that the Commonwealth’s pension system was unfounded by as much as $11 billion. The ERS is only 17% funded, the lowest funding ratio in the entire nation. By contrast, some states already are concerned about the sustainability of their pension systems, with present funding ratios of more than 80%. "There are practically no states in the 20% to 25% range in terms of funding ratios. There are a few in the 30% range, but most are in the 40%, 50%, and 60% range," stated Juan Cancel, the ERS administrator. According to the 2004 Wilshire Report on State Retirement Systems, based on 2003 data, the Alabama ERS system is 90% funded, the Texas ERS system is 86% funded, the Pennsylvania ERS system is 81%, and the Hawaii ERS is 64% funded. The retirement systems of the states of Florida, California, New York, and Michigan are 104%, 92%, 86%, and 73% funded, respectively. Illinois, which has the lowest funding ratio among the statewide systems, is 49%. Demographics are working against the system as well. With the upcoming retirement of the baby-boomer generation, the government pension fund is set to receive a major blow from the dramatic increase in retirees. By the year 2035, the U.S. population over the age of 65 is expected to double. The fact people also are living longer and consequently extending their years of dependency on the ERS is another factor of concern. Passing the buck The Commonwealth ERS has the lowest capitalization of any state government pension plan in the U.S. Since financing for this actuarial deficit falls on the Commonwealth, it affects the government’s credit quality, a situation the credit-rating agencies have been scrutinizing closely. Employee contributions haven’t increased since 1991; however, the ERS has increased participant benefits over the past 14 years. Cancel says if nothing is done to remedy the ERS, it won’t be able to survive more than 15 to 17 years. For the past five to six years, the ERS already has been paying more benefits than it has been receiving in contributions. Describing the worst-case scenario for the retirement system, Cancel said they soon would have to start selling off the system’s assets. "The ERS would have to start liquidating its assets to obtain enough liquidity to attend to the current pensions that must be paid," he stated, mentioning its investments and loans as possible assets to be sold if nothing is done to remedy a looming financial crisis. In Puerto Rico, there are five government retirement systems. In addition to the ERS, there is the Judiciary Retirement System, the Teachers Annuities & Pensions System, the University of Puerto Rico Retirement System, and the Electric Power Authority Retirement System. Although they share many of the same problems, Cancel assures the most critical is the ERS. The origin of the problem The problem appears to have arose simultaneously with the ERS in 1951. In the June 30, 2004, Management Discussion & Analysis portion of the ERS financial report, management states, "Since its inception, the ERS lacked proper planning, and contribution levels were relatively low [and still remain low in comparison to the level of benefits]. All retirement systems in place before 1951 were merged into the ERS, which then had to absorb all unfunded liabilities. Afterward, in 1973, the benefits structure was enhanced but lacked an appropriate increase in contribution levels. As more people joined the government labor force and then retired under the new enhanced benefit structure, the gap between available assets to pay benefits and actuarial obligations started its course." Edmundo Garza, former director of investments & deputy administrator of the Commonwealth ERS from 1991 to 1995, and current executive vice president of Consultiva Internacional, believes the root of the current crisis was the benefit-enhancement program. "As time passed, new benefits were granted, such as increasing the minimum pension. Several were very taxing but, among them all, the one with the biggest impact on the ERS was the Merit Pension," Garza stated. The Merit Pension established that all participants who had completed at least 30 years of service could receive 65% of their annual salaries as a pension if they retired before age 55 and 75% of their annual salary if they retired at age 55 or older. Before the enhancement, employees who had completed 30 years of service were entitled to receive 45% of their annual salary, about 1.5% of the salary for each year of service. "Definitely, for me, in all the analysis I had to prepare back then, those were the worse hits to the system, which were further aggravated because the enhancements established the benefits would be based on the highest salary received by the employee during his or her career," Garza explained. Garza added that once the rules were changed, people learned how to work the system in their favor. For example, according to the former deputy administrator, Commonwealth employees would work for several years in a higher-paying position and then return to their lower-salary position, already guaranteed increased benefits upon retirement. Other workers managed to win positions of trust, receiving higher salaries and benefits despite returning to lower-paying positions when the agency head changed. Once the system realized it wouldn’t be able to sustain the promised benefits, it returned to the original benefits formula, with the exception of police officers and fire fighters. However, efforts to contain the increase in unfunded liabilities didn’t occur until 1990. The benefits structure basically was modified to decrease benefits and postpone retirement from age 55 to 65. The contributions level was raised and Law 447, under which the system was created, was amended to provide that any increase in benefits would require actuarial studies and must state the financing source(s), a requirement that isn’t always met, according to Garza and Cancel. On Sept. 24, 1999, more drastic reform of the Commonwealth pension plan was implemented, changing from a defined benefit plan to a defined contribution plan. The reform, called System 2000, became effective Jan. 1, 2000. Employees were given the option to either stay in the defined plan or transfer to the new one. Workers employed after Jan. 1, 2000, no longer are offered that choice. System 2000 is a hybrid-defined contribution plan, also known as a cash-balance plan. Under this plan, a pool of plan assets is invested by the ERS, together with those of the defined-benefit plan. The Commonwealth no longer guarantees benefits at retirement age. The pension annuity is based on a formula that assumed participants’ annual contributions (a minimum of 8.275% of their salary, up to a 10% maximum) would be invested. Participants could choose to invest in an account that either earned a fixed rate based on the constant two-year maturity of treasury notes, earn a rate equal to 75% of the return of the ERS investment portfolio, or earn a combination of both options. Disability pensions were eliminated in the ERS, although employees could opt to enroll in a private plan. Sponsor contributions, which are 9.275% of a participant’s salary, would be used to fund the defined-benefit plan. In other words, sponsor contributions are used to fund the system’s current pension payments. Employees enrolled after 2000 won’t receive any funds from the government; they only will receive what their investment accounts collect over the years. Under the new system, the retirement age was reduced from 65 to 60. When asked to describe the system’s most serious mistakes, Cancel immediately points out that the origin of today’s problems lies in the foundation of the system. "The system was created and workers started receiving benefits while the system still didn’t have the funds to pay them. That was the first mistake," Cancel pointed out. The second mistake, in Cancel’s view, is that benefits paid don’t directly correlate with the contributions individuals and employers make to the system. "The recommendation of the actuaries is that the employer contribution should be 17% of salary; right now, those contributions are 9.275%," he said. The third mistake Cancel pointed out was that previous early-retirement programs were approved without providing the system with sufficient funds to absorb the added costs. Previous early-retirement windows, which allowed workers to retire before they had reached the required age and years of service, also had a substantially negative impact on the system, Cancel says. The administrator explained that in the past, the positions left vacant when a government employee retired, were filled, meaning the problem was multiplied. For this reason, Cancel explained that another early-retirement program, such as the one proposed by the current administration, still is being evaluated. Continual increases in promised benefits also were signaled as serious culprits of the current situation. They often were promised by legislators in an effort to attract electoral support. "One of the biggest problems is the quantity of approved legislation that has had an impact on benefits, which effects pension amounts and…the financial structure without assigning the necessary funds. Hundreds…of legislative measures were passed that increased benefits…without assigning the necessary funds and resources to attend to those increases, which created a substantial dislocation in the system," Cancel emphasized. A situation that can’t be ignored Investment choices also have acted as accomplices to the system’s woes. Garza pointed out that since the system began up to 1988, investments were limited to fixed-income instruments, which didn’t always beat inflation rates or contribute to the system’s growth. On the other hand, Cancel also indicated that past stock investments, which lacked sufficient internal controls, caused substantial losses in the system’s investment portfolio during declines in the stock market. ERS assets as of June 30, 2004, were $2.235 billion, consisting of $1.269 billion in marketable securities, $42 million in alternative investments, $404 million in Puerto Rico Telephone Authority (PRTA) Holdings Preferred Stock, $369 million in participant loans, $8 million in real estate, $46 million in net cash and equivalents, and $97 million in other net assets. Although ERS assets increased $194 million from the previous year, it is hardly enough to attend to the $9.244 billion actuarial deficit. In fact, in the most-recent actuarial valuation report for the Commonwealth ERS, which was revised Dec. 22, 2004, the actuaries clearly stated the ERS’ economic situation could no longer be ignored. "Since our most recent valuation in June 2001, ERS assets have decreased from $2.4 billion to $1.9 billion, which sends a clear message about the ERS’ critical financial status. We call on the Puerto Rico government to increase meaningfully and without delay the funded status of the system to avoid a catastrophic situation in the near future," stated actuaries Héctor D. Gaitán and José Fernández, from Mellon Financial Corp., one of the world’s leading providers of financial services for corporations, institutions, and affluent individuals. The actuarial report indicated the annual returns on assets (ROA) for the fiscal years ending June 30, 2002 and 2003 were approximately 12.98% and 2.95%, respectively. Since June 30, 2000, assets have decreased an average of 6.89% a year. This contrasts with an annual assumed investment ROA of 8.5%. The aggregate asset losses generated by the difference between the expected 8.5% returns for the three-year period ending June 30, 2003, added up to approximately $1.046 billion. The actuaries also attribute the two-year, 25% to 17% fall in the system’s funding ratio to an increase in the average employee salary from $16,104 in 2001 to $20,590 during the most recent valuation. This represents a salary increase of 13% annually vs. an expected 5% increase. The actuaries pointed out that the data available to them included many active members with missing or incorrect dates of birth, dates of hire, and salary information. In addition, a significant number of retirees also had incomplete or incorrect information, which forced them to use approximated data for those members based on calculated averages. The actuaries indicated they had absolutely no data available for the June 30, 2002, valuation. "We strongly recommend the ERS make an attempt to collect accurate and complete census data to more accurately reflect [its] liabilities," they stated in the report. The system’s liabilities would be even higher if it included the obligations implied under the "Special Laws Benefits"; however, the actuaries indicate the system’s administration instructed them not to include the 3% cost-of-living increases that are passed every three years to present and future retirees; increases in the minimum benefits payable to current retirees and beneficiaries; increases in the minimum benefits to future retirees; as well as increases in joint and survivor benefits from 30% to 50%. The system administrators indicated these benefits are the responsibility of the government of Puerto Rico. The auditors of the government of Puerto Rico agreed to the propriety of this action. This means if these benefits were taken into consideration under the system, the liabilities would be even more. It also means these amounts basically are added to what the government owes the system. Government not paying up Documents obtained by CARIBBEAN BUSINESS show the central government owes $57 million in special legislation measures as well as another $6.4 million to the pension fund. Public corporations owe the system another $17 million. The public corporations with the most debt to the system are the Medical Services Administration, which owes $13.52 million, and the State Insurance Fund, which owes $2.76 million. It is interesting to note the State Insurance Fund has an investment portfolio of more than $1 billion. There is another $1.4 million and $1.6 million owed to the ERS by the JRS and incorrect pension payments, respectively. Municipalities owe the Commonwealth pension plan about $10 million. Among the municipalities with the highest debt are San Juan with $4.44 million and Quebradillas with $1.25 million. Officials from the municipality of San Juan confirmed that through an established repayment plan, the municipality will be liquidating its debt with the ERS by December of this year. This means the Commonwealth ERS is owed $93.2 million. However, the fact many public corporations, agencies, and municipalities are facing tighter budgets for fiscal 2006 may be a substantial challenge for the repayment processes to begin in the near future. Puerto Rico isn’t alone State pension plans across the nation are facing many of the same challenges as the Commonwealth retirement system. While most enjoyed a rebound in the 1990s, thanks to higher stock holdings, by 2000, most were in a healthy condition; but they have quickly dropped into the red since then, plagued by lower returns and increased pension promises. The 2005 Wilshire Report on State Retirement Systems shows that of the 64 state retirement systems that provided actuarial data, 84% have market value of assets less than pension liabilities, in other words the plans are unfunded. These unfunded plans had pension assets of $778.9 billion and liabilities of $942.3 billion. The study revealed that 16 states had liabilities exceeding their state budgets, up from nine in the previous report. In the 2004 report, Wilshire associates found Illinois, which is the fifth-wealthiest state in total income, was the state with the most unfounded liabilities with $43 billion, equal to 197% of the state budget. This isn’t a new problem; the state has been struggling with its pension system for 30 years. In New York, pension-funding costs have more than doubled, leading taxes to jump an average of 20% over the past three years. In 2004, the pension bill came in at $2.46 billion, or 8% of the city’s budget. As much as $251 million consisted of increased benefits for cost-of-living adjustments. By 2007, the Independent Budget Office of the City of New York projects pension contributions to hit $4.9 billion, or 12% of its $40.5 billion budget. California this year will pay $3.5 billion into pension and health benefits for retirees, almost triple what it paid just three years ago. Increased benefits also had a lot to do with rising contributions; 25% or $600 million of the $2.6 billion contributed to pension plans during 2004-2005 resulted from promised benefit increases. Reports indicated that in Michigan, pension and retiree health expenses at some schools went from 12.99% of the payroll to 14.87%, and state finance experts predict it will hit 20% within three years, which could represent a substantial loss of capital for financing essential educational programs. Wilshire Associates says the biggest cause for the sharp drop in funding levels in public plans over past years was a drop in employer funding and a reliance on investment gains to make up the difference. The public pension systems aren’t the only ones experiencing funding problems. Reports indicate private-sector pension plans are unfunded by $450 billion. On June 9, it was announced that Pension Benefit Guarantee Corp. (PBGC), the federally sponsored company that protects the pensions of 45 million workers and retirees in 31,000 separate plans, is $23 billion in the red, and that deficit could balloon to $71 billion in the next 10 years. To eliminate the deficit, a fivefold increase in premiums paid by companies would be required, which is almost impossible, partly because it would cause many companies to claim bankruptcy, and unload pension plans on the PBGC, which would further aggravate the problem. This scenario has created more urgency for Congress to consider an overhaul of pension legislation. The U.S. House Education & Workforce Committee is proposing that thousands of companies with defined-benefit pension programs pay higher premiums, from $19 annually per worker to $30. The problem behind the Social Security System, which has become a main focus of the Bush administration, has much in common with the challenges faced by pension systems. The fact that these systems, which were designed for the same purpose, could be unsustainable makes the situation all the more serious. Among the solutions being considered in the mainland U.S. for public-pension funds are issuing more debt; state and local governments have issued more than $30 billion in pension-obligation bonds in past years, a solution considered risky by some because it pushes the costs to future generations. Other funds are investing in riskier sources, such as foreign equities, hedge funds, private equity funds, and real estate; and yet others are pushing more of the risk to workers by creating 401(k)-style plans. Steven Foresti, one of the authors of the Wilshire report, told CARIBBEAN BUSINESS that retirement systems aren’t meant to be completely funded all the time, but rather are intended for long-term sustainability. However, Puerto Rico’s ERS, which has the lowest funding ratio in the nation, has little possibility of reaching its long-term scenarios if reform doesn’t occur immediately. Proposed solutions In Cancel’s view, the most urgent step that has to be taken to reform the Commonwealth ERS is approval of a $2 billion bond issue. According to Cancel, that issuance would duplicate the assets of the system. "Our current assets are close to $2 billion. The bond issue would double it to $4 billion. The amount we would have in investments, which is what produces income to attend to the pension needs, would not only significantly increase, it would be more than double because our investments would increase from $1.3 billion to $3.3 billion. The income generated from the reinvestment would have a substantial impact on the total income generated in the system," Cancel emphasized. However, some have expressed opposition to this measure because of the impact it could have on the general fund since the Commonwealth would be responsible for paying part of the debt. "The impact would be much less than if the general fund had to pay $9.42 billion [the system’s deficit] all of a sudden. It is a step in the right direction. Clearly, a bond issue is to be paid in the long term; it is a prudent and manageable amount…I think it will be positive for the market, for the rating agencies. And yes, it will have an impact on the general fund, but it needs to be done," argued Héctor Mayol, managing director of the Samuel A. Ramírez securities firm and former commissioner of Financial Institutions, who has vast experience with pension funds. On this latter point, Cancel added that the system also will participate in the repayment of debt, utilizing funds to which the system is entitled through special legislation. At the moment, the system has $83 million through those measures, although it expects that amount to grow to $100 million in the next four years. Another proposal is the increase in contributions from employers and individuals to 10%, up from 9.275% and 8.275%, respectively. These contributions haven’t been revised since 1990. Cancel pointed out that the increase in assets, investments, contributions, and income would add more cash flow to the system for the next 10 to 12 years. Government Development Bank (GDB) President William Lockwood urged approval of the measures as strategies to attend to the actuarial deficit and cash deficiencies that the agency faces. "After a profound analysis of the fiscal situation of the ERS, which has been taking place for over a year, we have identified these measures as the best alternative to attend to the fundamental problems the agency faces," Lockwood stated. Lockwood also emphasized the importance of getting the government agencies, public corporations, and municipalities to pay back the accumulated debt to the system. Cancel stated the system is in conversation with the GDB and soon will sign agreements that require municipalities to submit debt certifications when requesting loans from the GDB. In this manner, if the municipality has debt with the system, the amount being solicited is used to eliminate the debt or to make a substantial payment to the system before allowing it to go on with other projects in the municipality. Stock sale considered The sale of Puerto Rico Telephone Authority (PRTA) Holdings Preferred Stock, the system’s investment in Telpri, is another proposal the GDB and Lockwood mentioned. Telpri is the corporation created in 1999 to facilitate the sale of the PRTC. PRTA, a GDB subsidiary, issued and assigned its noncumulative, nonvoting preferred stock to the ERS. This stock entitles the system to receive all benefits generated by Telpri stock. When asked how the sale of this investment could affect the system, Cancel explained the investment hasn’t delivered expected results. Cancel explained that in 1999, when the sale was completed, the proceeds were intended to go to the ERS and the Infrastructure Financing Authority; however, the system never received a single cent from the $2 billion made on the sale. The only result the system received was title to the PRTA Holdings Preferred Stock, from which Cancel says it didn’t receive dividends until 2002. That year, the system received $17.4 million in dividends. In 2003, it collected $38 million in dividends but, in 2004, dividends went down to $3.5 million, which represents a 0.86% return. "We have some investments that are giving us 8.5%, 9% returns, which doesn’t compare to what we get from Telpri, which is why we are considering the sale of PRTA stocks. Within the structure and fiduciary responsibility of our participants, we have to manage our assets in the most responsible manner...With a $9.2 billion deficit, it wouldn’t be very responsible on our part to have an asset of $404 million on our books that represents a return of 0.86%," stated Cancel. He added that the option is being considered although it is uncertain if it is the best moment to sell. So far in 2005, the system has received $14.9 million in dividends. Mayol agrees the sale option is a good idea. "I was part of the cabinet when the government was considering to sell its share in Telpri. My position was don’t keep the stocks, try to sell them all…My recommendation now would be to have a public offering. If we want to keep our patronage, let us present them in a public offering to the Puerto Rico market so local investors can buy them. We know the possibility of financing exists…There is a way to do it; there just needs to be a bit of imagination," Mayol said. Lockwood added that a second phase of the ERS reform would include assigning 1% of the revenue received from the anticipated tax reform and assigning the residual product of the Tobacco Companies Agreement, which would be available after the Children’s Trust bonds are paid. Myrna Rivera, president & CEO of Consultiva Internacional, recently concluded a project with one of the five retirement systems in California, which are the biggest pension funds in the world. Rivera believes that as part of the Commonwealth ERS reform it is important to consider giving local consultants participation in the management of the fund. She points out that in states like Illinois and California, there is legislation that requires a certain percentage of the funds be managed within the state and another percentage be handled by women- and minority-owned companies. The investment portfolio of Puerto Rico’s retirement system is 100% managed by external consultants. To this point, Cancel responds the ERS is in the process of doing just that. "We have told our consultant it is the administration’s policy to open the doors to local consultants. There is no reason why only U.S. managers should be in charge of investing funds from the ERS when we have local brokerage firms and banks that have the experience and capacity to do these transactions from Puerto Rico. [As a result,] we would be giving work and economic activity to local firms, creating jobs, and collecting taxes from the local operations," said Cancel, pointing out the positive impact this could have on the island’s economy. "We understand that when we receive the $2 billion we will be using local money managers for the benefit of Puerto Rico and the local banking and financial industry," he added. Cancel also indicated that at some point there could be investment in local stocks and funds, like the Guayacán fund. Cancel believes if the reform measures that have been identified thus far are approved, the system will be able to improve its standing significantly. "Our goal in the next two years is to increase [our standing] from 17% to at least 30% through the proposed measures. This would give security to the system and the credit-rating agencies," he concluded. The most important goal for the ERS should be to ensure the same mistakes, which have continued to repeat themselves throughout its history, are finally put to rest. "Anything we do now will affect pension plans 10 years from now. What we are suffering through right now is the result of decisions made or not made 20 years ago," Rivera pointed out, emphasizing that the problem can’t be ignored any longer. "This situation has been in every government transition report from one party to another, from one administration to another, since the origin of the Commonwealth retirement system." Although the warning signs have been there for more than half-a-century, there has been little effort to remedy the situation. "I think it is a fascinating time, a tremendous opportunity to do some really creative things, but it takes a lot of determination," Rivera concluded. Determination, rigor, and a proactive approach will be essential to correct historical wrongs and successfully reform the system so ERS can fulfill its social promises to existing and future generations. Chile’s pension system considered model for reform but imperfections arise Utilized as an international reform model, Chile’s pension system remains popular although opponents are gaining ground After almost a quarter century since its inception, the Chile Pension System continues to be considered a model for reform. President George W. Bush has made allusions to the system’s success in his attempts to reform the U.S. Social Security System. Peru, Argentina, Colombia, Bolivia, El Salvador, and Mexico took the lead from Chile and converted to similar pension systems. European countries also have actively studied the Chilean model in attempts to restructure their own systems and emulate Chile’s success story. Chile’s original pension system was created in 1925 and, by 1970, was facing bankruptcy. When Harvard graduate José Piñera was appointed minister of labor and social security, his team changed the system from one that was pay-as-you-go, in which pensions for the elderly are financed by taxes on current workers, to a Pension Savings Account (PSA) system. In other words, they privatized it. The way it functions is employees’ payroll taxes, 10% of their salary, go into a private, individual pension account that would be their own property. Workers are allowed to contribute an additional 10% to their account, which is deductible from taxable income. The money is invested in professionally managed funds of stocks and bonds. If employees change jobs, the retirement accounts move with them. Every worker gets a PSA passbook and receives a statement update every three months to keep track of how much is accumulating in the account and how the investments are performing. Individuals are allowed to choose freely among a number of private companies that invest in a diversified, low-risk portfolio. The companies, which can’t engage in any other business, are regulated by the government-run Administradores de Fondos de Pensiones (AFP) (Pension Fund Administrators), and the state also guarantees a minimum pension if workers’ savings fall short. Chile’s retirement age is 65 for men and 60 for women. Once the pension payments begin, workers are welcome to continue to work without contributing to the plan. The transition to the PSA system was financed through the issuance of government bonds, privatization of state-owned businesses, a temporary transition tax, and cuts in government spending. By 1998, Chile’s private-pension system had accumulated an investment fund of approximately $30 billion, with only 14 million people and a gross domestic product of $70 billion. The average worker was earning 12% a year after inflation, and pensions were more than 50% higher than under the old system. The country’s savings rate increased from less than 10% in 1986 to almost 29% 10 years later. By 2001, the Chilean economy increased from a yearly growth average of 3% to 7%. Not all that shines is gold A testimonial published Jan. 27 appears to offer a different picture of the Chilean pension system. "Colleagues and friends with the same pay grade, who stayed in the old system, people who work right alongside me, are retiring with pensions of almost $700 a month…I am going to be plunged into poverty, all because I made the mistake of believing the promises they made to us back in 1981." This worker is entitled to a $315 monthly pension, after 24 years of contributions from a $950-a-month salary. Despite the system’s historical success, cries of protest recently have been heard. The main complaint seems to be the high fees charged by the companies managing the account. These companies have developed into lucrative businesses since the six companies in the industry had an average return on assets of over 50% a year from 1999 to 2003, despite an economic recession in Chile. A December 2004 report shows AFP estimates that over half the affiliates of the system will never be able to save enough in their pension accounts at retirement to fund even the minimum pension. Savings for retirement should be at least 50% of the average salary of the previous 10 years, according to the Chilean model. Multiple studies also described the state’s guarantee of a minimum pension as ineffective because it requires 20 years of contribution into the system. The assistance pension offered by the state, which is about $50 a month, is limited to the extremely poor population. One of the problems that led to the current situation in Chile is the population has proved to be highly unstable in terms of employment–most are constantly in and out of short-term salaried jobs. As a result, 70% of the workforce contributes less than six months a year into the pension account, and half the working population contributes less than four months each year. The World Bank, which for decades supported Chile’s private-pension system, published a report in December 2004 called "Keeping the Promise" in which the institution acknowledges the system’s weaknesses and points out the need for further reform. The solution, for which many in the country are calling, is the creation of a private-public system that also would require the state to contribute to the pension funds in addition to the individual savings in private accounts. Commonwealth Retirement Systems Participants As of July 1, 2003 Employees Retirement System / Judiciary Retirement System / Teachers Retirement System / Total Retirees & beneficiaries: 88,518 / 338 / 28,046 / 116,902 Current employees: 161,947 / 336 / 50,723 / 213,006 Total: 250,465 / 674 / 78,769 / 329,908 Source. Comprehensive Annual Financial Report for the Commonwealth of Puerto Rico, June 30, 2004 Commonwealth Employees Retirement System Actuarial valuation date / Actuarial value of assets / Actuarial accrued liability (AAL) / Unfunded AAL / Funded ratio July 1, 2003: $1.947 billion / $11.191 billion / $9.244 billion / 17% July 1, 2001: $2.429 billion / $9.881 billion / $7.452 billion / 25% July 1, 2000: $2.042 billion / $9.459 billion / $7.418 billion / 22% Source: Comprehensive Annual Financial Report for the Commonwealth of Puerto Rico, June 30, 2004 Funded Ratios System: Ratio Florida: 104% California: 92% Alabama ERS*: 90% New York: 86% Texas ERS: 86% Pennsylvania ERS: 81% Michigan: 73% Hawaii ERS: 64% Illinois: 49% Puerto Rico ERS: 17% *Employees Retirement System Source 2004 Wilshire Report This Caribbean Business article appears courtesy of Casiano Communications. or
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