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Puerto Rico addresses collapsing pension system

Wednesday - 2/27/2013, 7:00pm  ET

DANICA COTO
Associated Press

SAN JUAN, Puerto Rico (AP) -- Puerto Rican officials on Wednesday proposed what they called "severe" cost-saving measures designed to help rescue one of the U.S. territory's public pension systems that is on the brink of collapse.

Treasury Secretary Melba Acosta called for increased employee contributions, a higher retirement age and reduced benefits and monthly pensions for certain workers.

"The problem is very severe and the problem is very large," she said. "We have to take quick and forceful action."

The proposal was endorsed by Javier Ferrer, president of the Government Development Bank of Puerto Rico, who said it urgently needs to be approved by the legislature.

"The reality is that the government does not have the resources to keep contributing additional funds to the system," he said.

The plan would raise employee contributions from about 8 percent to 10 percent, and increase the retirement age from 58 to 65 for some workers and from 65 to 67 for others. It also would transfer certain employees from a defined-benefit plan to a hybrid plan that included a defined contribution component.

Acosta and Ferrer also want to reduce bonuses and medical plan contributions, but say minimum monthly pensions should rise from $400 to $500.

The proposal is to be submitted to legislators this week. Gov. Alejandro Garcia is expected to sign it if lawmakers approve the plan.

Acosta said that even if the plan is approved as it currently stands, the Caribbean island's nearly depleted general fund would still have to contribute $100 million a year for several decades to ensure the pension system keeps operating.

The announcement comes amid stern warnings from economists and credit rating agencies that the pension system is buckling under a more than $37 billion unfunded liability. Experts previously recommended that the government reduce benefits, raise the retirement age and increase contributions from current employees.

Most of the problem centers on two pension systems set up for teachers and for government workers that stopped accepting new beneficiaries in January 2000. Those plans cover more than 273,000 active and retired government workers.

The systems initially allowed employees to retire at age 55 after 25 years of service or at age 58 with 10 years of service. In 1990, legislators amended the law to reduce benefits and increase the retirement age from 55 to 65 years for newly hired workers.

But liabilities kept growing, and legislators scrapped that system in 2000 and created a new one similar to a 401(k)-type plan in which workers must make their own contributions.

While the new system is considered financially secure, the old system's financial problems remain.

In 2010, then Gov. Luis Fortuno warned that the overall state pension system was paying $679 million more a year than it received in contributions.

The problems with the original system have damaged Puerto Rico's bond ratings, which remain significantly lower than any U.S. state, raising the island's cost of borrowing.

Puerto Rico is emerging from a six-year recession and still has an unemployment rate higher than any U.S. state at 14 percent. The island also is trying to reduce its $69 billion public debt and a $1.2 billion deficit.


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