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Analysis: PERS is the elephant in the room

Established in 1952 by the Mississippi Legislature, the Public Employees Retirement System (PERS) is a defined benefit plan designed to provide benefits to the state’s public sector workforce. PERS provides benefits to eligible employees of state agencies, municipalities, counties, universities, community colleges, public schools, and other participating public entities.

There are two categories of pension programs: defined benefit plans and defined contribution plans. Defined contribution plans, such as traditional 401(k) accounts, are widely used in the private sector. Typically, both the employee and employer (though not required) contribute to the employee’s account as a specific percentage of employee gross wages. Contributions are generally pre-tax, whereas withdrawals are taxable.

Defined benefit plans, such as PERS and virtually all other public pensions, including Social Security, function similarly in that both the employee and employer contribute a specified percentage of employee wages to the employee’s retirement account.

The key distinction between traditional private sector 401(k) or IRA accounts and public pensions is in how benefits are handled.

In reality, except for the employer contribution and pre-tax feature of 401(k) accounts, these instruments aren’t technically benefits. Rather, 401(k) plans are simply special savings accounts, where the investment of funds in the account is controlled by the employee. After age 59 and a half, the account holder can withdraw as much as they want from the accumulated funds, at any time they choose. 401(k) plans have a finite value. Retirees have access to the funds accumulated during employment until the account is depleted.

Unlike defined contribution plans, defined benefit plans, such as Mississippi’s PERS, pay benefits for life – regardless of the amount a member employee and their employer contributed to the program. Base service benefits are determined according to a formula that considers the highest four years of salary and the number of years of service. Benefits aren’t directly tied to contributions accumulated while the member is working.

To further illustrate the economic challenge with defined benefit plans, consider Ida May Fuller, the first Social Security recipient. Ms. Fuller worked for three years under the Social Security program. She paid a total of $24.75

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