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Puerto Rico’s Pension System: Knocking on Heaven’s Door
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Introduction The Employees Retirement System of the Commonwealth of Puerto Rico (the “ERS”) is a trust created by Act 447 of May 15, 1951 to provide pension and other benefits to retired employees of thegovernment of Puerto Rico and its instrumentalities. According to the Management’s Discussion and Analysis included in the ERS’s most recent financial statements, the system “since its inception lacked proper planning.”1 The problem was (and to a certain extent still is) that the level of both employer and employee contributions was relatively low and was not actuarially determined, while thelevel of benefits was statutorily defined and bore no relation to employee contributions or to the investment yield of the systems assets. In 1973 the benefit structure was “enhanced” without enacting a corresponding increase in contribution levels. As government employment increased in the mid-to-late 1970s, partially in response to the general economic slowdown, the gap between the assets availableto pay benefits and the actuarial obligation began to widen. In 1990 the Puerto Rico legislature enacted Act 1 of 1990, which reduced some benefits and increased the retirement age from 55 to 65 in order to provide a more affordable structure. In addition, contribution levels were increased and Act 447 was amended to provide that any future proposals to increase benefits be supported by anactuarial analysis and include a financing source. Notwithstanding these changes, by the year 2000 the large accrued unfunded actuarial liability of the system required further action. As a result, the defined benefit plan was closed to new plan members joining after January 1, 2000. Government employees hired after that date would participate in a defined contribution plan known as System 2000, which isfunded solely from employee contributions. Under System 2000 employer contributions continue at the same level but are applied to partially fund the accrued actuarial liability of the defined benefit plan that was closed in 2000. Therefore, the ERS currently consists of three different benefit structures that are administered pursuant to their respective statutory requirements. 1. Act 447 of 1951! ! Type of Plan – Contributory, defined benefit plan. Eligibility for Membership – Employees of the Government of Puerto Rico (except teachers); employees of public corporations (except employees of (i) the Puerto Rico Electric Power Authority and (ii) the University of Puerto Rico); municipal employees (including mayors); employees of the Puerto Rico Police Department; employees of the PuertoRico Fire Department; and irregular personnel fulfilling the requirements of a regular employees, who were hired prior to April 1, 1990.
Employee’s Retirement System of the Government of the Commonwealth of Puerto Rico, Basic Financial Statements for the Year Ended June 30, 2009, April 2010, p. 8.
Retirement Age – Age 55 with 25 years of accredited service or age 58 with 10 yearsof accredited service. Standard Benefit – 1.5% of the average compensation for the 3 highest years of compensation received multiplied by years of accredited service up to 20 years of service, plus 2% of the average compensation for the 3 highest years of compensation received multiplied by years of accredited service in excess of 20 years of service. Maximum benefit is 75% of the averagecompensation for the three highest years of compensation received. Employee Contribution – Plan members make contributions equal to 8.275% of their salary. Employer Contribution – Employer contributions are statutorily set at 9.275% of the employee’s salary. Type of Plan – Contributory, defined benefit plan. Eligibility for Membership – Employees of the Government of Puerto Rico (except teachers);...
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