State Pension System Is a Huge Success

I doubt whether the average citizen in this state understands just what an incredible retirement system the state of Wisconsin has.

For starters it is huge. It ranks as the 25th largest pension fund in the world and the ninth largest in the U.S. Only the much bigger states of California, New York, Texas and Florida have larger funds.

What makes Wisconsin’s system so much larger than in nearly every state is how all-encompassing it is. Nationally, there are 5,232 state and local pension plans or an average of more than 100 per state. Pennsylvania leads the way with an astounding 1,594 retirement systems and Illinois is second, with 651.

But in Wisconsin nearly every government worker is part of the state system, including public employees of the state and nearly every county, city, town and village, as well as the University of Wisconsin system, vocational-technical colleges and 421 public school districts. Only the City of Milwaukee and Milwaukee County, which have their own pension systems, are not part of the state plan, but recent state legislation giving the city a new sales tax and increasing the county’s sales tax also calls for the eventual absorption of all city and county employees by the Wisconsin Retirement System (WRS).

As of Dec 31, 2022 there were 677,905 individuals covered by the WRS, including 260,504 active participants, 232,384 retirees, and 185,017 inactive participants, such as former employees, who were not yet receiving benefits. A remarkable “one in five Wisconsin residents are either a WRS member or are affected by the WRS as a family member,” its website notes.

And for those recipients, the pension helps them maintain a good life. The average pension amount is $26,933 per year.

A new study by the National Institute on Retirement Security has found that such pensions have helped reduce the wealth gap in the U.S. The report found the wealth value of public pensions “is distributed more equitably by race and gender than other private financial assets, thereby narrowing the wealth gap among older families. For example, public pensions are a key pillar of Black middle-class economic security, increasing the median wealth of older Black families by 46 percent.”

The study found that 87% of public sector workers in Wisconsin participated in a retirement plan, compared to just 62% of private sector workers. The difference could be seen among all groups — men, women, whites, minorities, college educated or non-college educated — were all more likely to have a retirement plan if they worked in the public sector. And all groups benefitted financially. For instance, the study found the public sector employs 10% of workers of color and accounts for 18% of retirement plan participants of color in Wisconsin.

And this tremendous financial benefit has come at a small cost to taxpayers because the WRS is so well-run. In another new report, released in February 2024, the National Association of State Retirement Administrators listed Wisconsin as the third-lowest-cost state in terms of contributions to pension as a percentage of all state spending at 2.12%. That was well below the 50-state average of 5.06% and far below the top state of Connecticut at 14.16%.

According to a recent public pension fund administration study, the annual administrative expenses associated with WRS retirement and disability programs was $51 per member, compared to $79 per-member for peer systems. And Wisconsin employs one full-time equivalent staff person per 2,100 members, compared to the peer system median of one per 1,500 members.

Over the past 10 years 84% of WRS revenues have come from investment earnings, another measure of how well-run the system is.

The WRS is also more fiscally solvent than nearly any state pension system. A September 2022 ranking by the government pension analyst Equable found Wisconsin was the fifth-best funded state pension plan in the nation, at 102% funded, meaning it actually had 2% more total assets than liabilities. This was far above the 50-state average of 77.9% funded and light years ahead of the worst states, New Jersey, Illinois and Kentucky, which were just 52% funded.

And that state average is likely to decline: A 2023 report by the Pew Charitable Trusts noted the historic problems of underfunded state pension systems and predicted the 50-state average would dip to a projected 71% funded by the end of 2022.

The report singled out Wisconsin and three other states as exceptions that have “demonstrated that fiscal discipline and sound policy can help states keep pension promises by maintaining full funding and stable costs.”

As impressive as these new reports are, research on the general excellence of Wisconsin’s system goes back many years. Yet Gov. Scott Walker and some Republican legislators believed the state should consider a 401(k) system like most private companies have. To that end, the language of the Act 10 law decimating public worker unions commissioned a study of the state’s pension system to compare its “defined benefits” plan for employees to an optional “defined contribution” plan like a 401(k) option.

The study, completed in 2012, buried the idea that a 401(k) system would be better for Wisconsin.

It found Wisconsin has “one of the lowest pension system costs for taxpayers in the nation” and “contains many pension policy best practices, such as a disciplined funding model and risk-sharing mechanisms that have allowed it to minimize the risks for taxpayers.”

The study also found Wisconsin’s pension benefit, where employees earn 1.6 percent of their final average salary for each year worked, “is lower than the average 1.95% multiplier reported in the Wisconsin Legislative Council’s… study of major public employee retirement systems.”

As for a 401(k) plan, an actuarial analysis found that to provide a comparable benefit to employees, an optional defined contributions plan “would require higher contributions than employers and employees currently pay.” The study also noted “numerous” past studies that a voluntary plan like a 401(k) results in many employees not signing up, reducing the size and growth of the retirement fund, “because of reduced economies of scale as well as restricting investment in certain asset classes.” Having state investment experts making decisions on how to invest the money rather than each individual employee (as in 401(k) plans), has resulted in far greater investment returns.

In reaction, Walker declared that the report “confirms that both taxpayers and pensioners are getting a great deal with the WRS,” adding “I want to be very clear: I am currently not planning to make any substantial changes to the WRS.”

But Walker often announced he didn’t favor something only to adjust the message in the opposite direction, as Urban Milwaukee documented. Moreover, his statement that he didn’t plan “any substantial changes” left the way open for some change. And sure enough, in 2015 some Republican slipped in a last-minute budget provision to overhaul the Joint Survey Committee on Retirement Systems, created in 1947, which had helped safeguard the state pension system for 68 years.

Under the law, the committee has 10 members, including six legislators and four experts: the secretary of the Employment Trust Fund (the state retirement fund), a public appointee who typically has expertise in this field, an assistant attorney general who is typically well-versed in pension laws, and the state Commissioner of Insurance or an experienced actuary designated by the Commissioner.

But the budget proposal would have dropped all the experts from the committee and stuffed it with 10 members of the Legislature structured as other standing committees are, meaning it would have a large majority of Republicans. David Bennett, executive director of the Wisconsin Retired Educators’ Association and its 12,000 members, called it “a very dangerous” proposal that would have “upset the balance of the retirement system” and create opportunities for mischief. “Public oversight is really important to the system,” he stressed. “One of the ways it’s been protected is by a lot of input from a lot of people with expertise in the system.”

As for Walker he made no statement opposing the proposal. But Bennett’s group succeeded in pressuring legislators to drop it. And Walker was never able to touch the WRS system.

The gradual addition of the city and county pension systems will grow the size of the WRS, making it even larger compared to other systems in the world and giving it even greater economies of scale that should increase its efficiency and investment returns. It’s a wonderful example of how government can protect the common welfare while also exemplifying the “Wisconsin idea” of employing education and expertise to improve the state’s government and economy.