STUMP » Articles » Wisconsin Wednesday: Is Benefit Growth Moderate? » 6 June 2018, 07:29

Where Stu & MP spout off about everything.

Wisconsin Wednesday: Is Benefit Growth Moderate?  


6 June 2018, 07:29

So I pointed out last week that supposedly pension benefits are adjusted up and down in the Wisconsin Retirement System.

Let’s see the official notes, and then let’s look at the real cash flows.


Annual Annuity Adjustments for the Core Fund and Variable Fund:

How does an annuity adjustment differ from a cost-of-living adjustment (COLA)?

The WRS does not provide guaranteed COLAs to retirees. Some retirement systems automatically pay annual increases of a set amount. However, many are beginning to revisit their COLA policies because of funding problems caused by such guarantees, as they tend to be unfunded liabilities.

After a WRS member retires, any annuity adjustments are based primarily on the investment returns of the trust funds. Actuarial factors, such as mortality rates, also affect annuity adjustments. Annuity adjustment rates are determined annually after the effective rates of interest are credited to the annuity reserve (the fund from which WRS annuities are paid).

Under state law, if after interest crediting there is more money in the annuity reserve than will be needed to pay the annuity reserve’s future benefit liabilities, an increase (in the form of a positive adjustment) may be granted. However, if there is less money than will be needed to pay the future benefit liabilities, the annuity adjustment must be a decrease to make up for the shortfall.

And payments have been decreased in the past. from 2012:

WRS retirees saw their payouts go down for the first time in 26 years following the 2008 recession. In that year, the worst for financial markets since the 1930s. the state’s Core Fund of stocks, bonds and other investments dropped a staggering 26.8 percent in value.

While WRS assets have since logged three straight years of positive returns, it hasn’t been enough to offset the 2008 losses. Also, the 1.4 percent return for the state’s Core Fund in 2011 did not meet the 7.2 percent assumed earnings rate — the figure actuaries set to estimate the fiscal stability of the fund.

That has left the Core Fund with a current negative balance of $1.68 billion, meaning retirees are going to take another hit when new payouts are calculated in early 2013.

Let’s look how the funds have actually fared in the past, what adjustments they claim, and what actually happened with benefit payments.


I found a historical record for the annuity adjustments, which also has the fund returns. There are two funds, Core and Variable. Let’s see if they live up to their names.

Well, the Variable Fund does seem to give more extreme results… but not really all that more extreme. Core is giving a pretty variable return.

That said, each of these are adjusted before determining the annuity adjustment.

Let’s see what happens with Core:

Ah, there we go. The heavy black line is the year-to-year return. The dashed line is a smoothed “effective rate” – that way you get up years and down years smoothed down, and that reduces volatility.

Let’s see what that’s like on the Variable side:

Yeah, that looks pretty variable to me. No smoothing (may be some adjustments from expenses or something like that).

So how do these translate into the annuity adjustments?

Here it is for Core:

Here it is for Variable:

Okay, it looks like you take that effective rate… and subtract something from it. What is that something?

What the heck happened in 2012? Hmm.

So here goes:

What seems to be happening is that the Core fund operates to smooth out year-to-year fund variability, and for that smoothing, Core fund “pays” — it looked like about 6% is subtracted per year, but something happened in 2012 that a much larger adjustment occurred.

Variable fund is not smoothed, and there is some near-0 adjustment made, usually, to the annuities.

So that’s what it says. What did the benefit amounts actually do?


The following comes from the Public Plans Database.

Let’s just look at the total benefits paid out:

Hey! That doesn’t look like the benefits are getting adjusted down at all!

(look, don’t email me yet – I know the issue… let me walk everybody through it)

Let’s compare against some other pension plans that had similar total benefits paid out in 2001:

Ah. And I just picked ones that had about the same in benefits in 2001 — other plans had much higher benefit growth rates than the three plans I picked.

What we’re seeing is that the Wisconsin Retirement System has benefits growing at only 5.4% per year, which is a 120% in 15 years. Contrast that to NY State & Local ERS — that 7.4% per year translates into a 190% cumulative increase in 15 years.

So yes, we’re seeing the benefits paid increasing… but there’s other stuff going on.

You have people retiring. You have people dying…. but those dying aren’t dying as rapidly as new retirees are being added.

And then the newly retired may have base pensions much higher than those who retired 20 years ago.

So our next cut is to look at what happens to the average benefits per beneficiary.


As above, let me use Wisconsin by itself to begin with.

And look at that. The percent labels show the year-over-year change for average benefits. Again, lots of things are moving around, so I didn’t expect that the average would change in line with the annuity adjustments. Older folks (with lower benefits) die and thus that raises the average; younger folks retire at higher levels and that also would raise the average. The negative annuity adjustments would counteract that.

Let’s compare this to the other 3 plans I used as comparisons above.

Well, well, well. I do not feel good about that high average benefit growth, as a New Yorker.

But yes, Wisconsin Retirement Systems really are keeping benefit levels in check.

So there’s a lesson.

Underlying spreadsheet here.

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