Colorado PERA Good or Bad The Truth

As a former financial planner in Colorado, I get a lot of questions about Colorado’s PERA program.

For those of you who are not from Colorado, PERA stands for Public Employment Retirement Association. It is a public pension plan for employees of the State of Colorado and public school teachers, similar to CalPERS, the public pension plan for California.

Recently, PERA has taken some lumps in the media. For whatever reason, Republicans hate PERA, even though it is a version of exactly what they want to do by reforming Social Security to be based on investing in the markets.

Sometimes, these criticisms are valid, and sometimes they are not. What is true, is that PERA is not just another ordinary pension plan, and to really understand it, requires delving into those details.

PERA and Social Security

The most important thing to understand about PERA is that it replaces Social Security. You know how people are always saying that Social Security would be better off if it invested worker’s contributions in the stock market? That is exactly what PERA does.

PERA logo

When Social Security was first started, state government employees were not covered by the program.

If you remember your Constitutional history, you’ll recall that the federal government cannot tax the state governments. The original thought was that the taxes required to make Social Security work could not be taken from state employees without violating this separation of powers. Prior to 1983, state and local governments could opt-out of Social Security and run their own programs instead.

In 1983, Congress saw that only a fool would willingly stay in the Social Security program, and was alarmed that it might lose out on the contributions of state workers if they flocked to better state run pension plans. The law was changed, however, any states that had already opted out were allowed to continue their own programs. Colorado’s PERA pension plan was grandfathered in under this provision.

PERA or Social Security

The choice then is for the State of Colorado to run a PERA-type retirement plan, or enroll its employees in Social Security. This is where so many criticisms fall down. If you are against PERA then that means you are FOR moving back into Social Security. There is no third option.

This is important because the State contributes a percentage of an employee’s salary to PERA on behalf of the employee. This amount varies, but is currently 16 percent.

Three percent of this amount comes from the budget for employee salaries. In other words, the pool available for salary increases for employees is 3 percent smaller for increased contributions.

Employer contributions to Social Security are 6.2 percent. When comparing the cost to the State for PERA, it is important to remember that the entire 16 percent could not be saved by eliminating PERA because then the State would, by law, have to contribute the standard 6.2 percent to Social Security instead.

It is also important to note that unlike most other large employers, the State of Colorado offers its employees no match on 401k contributions as an offset to higher contributions to employee pensions.

PERA Better Than Social Security

For employees, there is no doubt that PERA is better than Social Security. PERA allows for employees to retire with a full benefit after reaching the age of 60 and meeting the “Rule of 90.” The Rule of 90 requires that the employee’s age plus their total years of service add up to at least 90.

Thus, the earliest someone could retire with a full benefit would be at age 60, with 30 years of service. In contrast, Social Security is raising its minimum retirement age to receive full benefits to 67 for anyone born after 1960.

Furthermore, the payout from PERA is much higher than the benefits paid from Social Security, with PERA participants eligible for a benefit of 2.5 percent of their salary times the number of years worked. In other words, someone retiring with 30 years of service would get a benefit of 75 percent of their salary, much higher than most Social Security benefits, especially for higher income employees.

PERA also administers a 401k plan for employees, although like private 401k plans, it costs the state nothing. All expenses are deducted from employee accounts in the form of investment expenses and fees.

Maximum 401k contributions for employees are the same as for all other taxpayers. There is currently no matching contribution for State of Colorado employees. Employees can also use a 457 plan offered by PERA.

Problems With PERA

Unfortunately, in the late 1990s as the Internet Bubble grew and grew, the people running PERA got caught up in the same euphoria as the rest of the country. With account balances high, and the plan seemingly “over-funded,” PERA began to offer higher benefits and schemes that allowed workers to “buy years” at below cost. The result was a draining of the PERA pension fund right before the internet bubble popped and investment returns fell. By the time people got their senses back, it was too late, and the PERA pension fund was on thin ice.

Critics contend that these measures are proof that PERA cannot survive and that the State should get out of the pension business.

The reality is that if PERA hadn’t bowed to political pressure to grant greater benefits during the irrational exuberance of the internet bubble, the fund would be intact.

Assuming that lesson has been learned for another generation, PERA should end up just fine, and leave its members in much better shape than if they were part of the quickly bankrupting Social Security system.

PERA and the Great Recession

Then came the financial crisis of 2008, and PERA found itself underfunded again. Legislation was passed raising contributions to today’s higher levels. Employee contributions were raised as well as a way to replenish the trust fund. The higher contributions have made a difference, and if PERA can continue to receive market level returns, the ship will right itself.

Extraordinary returns in 2019 and 2020 should make for an interesting change in PERA funding status and reporting.

44 thoughts on “Colorado PERA Good or Bad The Truth”

  1. I’ve been in PERA for 25 years and now have to move. The plan is to teach in another state for 10-15 years. Would it be best to roll it over?

  2. I hope to retire at 65 and will have 15 years in PERA. As a part time, stay at home mom, in my earlier life, I see now that most of my work years do not meet the ‘significant/substantial’ criteria so I only have 13 years of SS earnings although I worked from the time I was 15! It appears I will have my benefit reduced over $400 per month. With so few years of PERA this doesn’t seem right. Are my calculations correct? There seems to be no consideration of the # of PERA years worked VS SS.

    1. If PERA is a defined benefit plan, can I not borrow from my plan earnings for a first time purchase of a home? Also, if cashing out a PERA account why do you suggest rolling over to a traditional IRA instead of a Roth IRA?

  3. I have been in PARA for about 4.5 years and have about 10 years of Social Security/401b from my prior positions. I have accepted a position with the University of Colorado and I have an option to stay in the PARA DB plan or move into a plan that pays social security plus 15% into a 401b plan (10% payed by employer, 5% by me). If I knew for a fact that I would stay at a PARA-eligible employer for the next 20+ years, it would be an easy decision. What do I need to think about when making this decision?

    1. Adam Brunin, NSSA

      You can receive your social security and PERA at the same time if you have 30 years of substantial earnings in the SS system. If you have less than 30 years of substantial earnings your SS is reduced via the SS’s Windfall Elimination Provision formula.

  4. I had PERA for 8yrs then quit and received a lump some from PERA. How will this effect drawing Social security with less than 20 years of paying into Social security?

  5. I am considering an offer to take a senior position in the state government and I will be PERA eligible. I am 5-10 years from retirement (full SS eligible in 5 years). Does PERA make any sense or should I opt out? Just FYI, i already receive a military retirement.

  6. I am currently already receiving Social Security. I plan on moving to Colorago and working part time at a community college. The only benefit for part time workers is contributions to PERA. Will I have to work 5 years before I could receive a pension from PERA? Would I be elibigle since I already receive SS? Would the amount of SS I receive (that is already set as my terminal amount, barring cost-of living yearly increases) be reduced when/if I receive PERA benefits down the road. Also, I receive a small pension from the Arizona retirement plan ASRS. Would I be able to roll this money into a PERA account?

    1. Wow. This is a lot of questions. There was a new law passed last year that changed a lot of the answers. Let’s start at the beginning. Contributions aren’t really a benefit, they are required by law. Either PERA or Social Security. There is no non-contribution option. When you could draw a pension depends on your age, but the real question is when would it be WORTH drawing a pension. With just five years of service, your pension would be minimal as monthly payments go. That being said, PERA does allow you to take a cash-value instead of pension. Fortunately, you don’t have to make any decisions about that until after your retirement with PERA. I don’t think you can roll your Arizona funds into the Colorado plan directly, although you could eventually “buy years” with that money if you went that route.

      Again, when, and if, you ever begin receiving a Colorado pension there is often an adjustment that goes with drawing both Social Security and PERA, however, that adjustment depends on a lot of things, including how much your Colorado PERA benefit is.

      Long story made short, take the job if you’d like, and work at it for as long as you like. When you are done, you can revisit these questions because there is nothing you can do differently now, anyway.

  7. As a collecting PERA retiree returning to full time employment with a PERA organization, will I be better off suspending my current PERA retirement or paying the penalties and continuing my current payout? I plan to work another five years or so and suspending seemed like the best option to me…

    1. This is a tricky question that depends A LOT on what you are going to making now, and how that compares to your current PERA payout. Your best bet is to get ahold of a PERA counselor (a real one employed by PERA, not a finance guy who says he is good with PERA.) He can actually put your SSN into a computer and tell you exactly what would happen in both situations, down to the penny.

  8. I left teaching about 20 years ago and had 7 years in PERA. It’s now worth $43,000. I am currently 53 and self-employed. My husband really feels PERA is in trouble. (He studies financial markets far more closely than I do.) He fthinks I should reinvest that money in a self-directed IRA or something like that. Thoughts?

    1. A couple of things. First, PERA is not “in trouble” by any stretch of the imagination for running out of money now. PERA is underfunded based upon it’s long-term liabilities. That is, that there is a possibility that sometime in the future PERA would not be able to pay all of the benefits it is scheduled to owe. That “someday” is decades away. So, your money isn’t in any danger. That being said, with only 7 years of service, you won’t be able to collect a pension no matter how long you wait, so it also doesn’t hurt anything to roll it over into your other retirement savings, assuming that you have the proper account setup to do so.

  9. I believe that when PERA was fully funded in 2000 and 2001 that they were only allowed to be 5% overfunded. I was told that the excess money, over the 5%, was used to , “… offer higher benefits and schemes that allowed workers to “buy years” at below cost…”
    Is this inaccurate?

    1. I don’t know about the 5% number, but yes. It was fully (over) funded. Then, they started draining off money right before (and during) the market implosion around the internet bubble.

  10. Thank you for this great explanation. I recently got married and my wife is a teacher and pays into PERA. I work at the University of Colorado and I currently pay 5% of my paycheck into a 401(a), which CU matches with 10%. I also have the option of PERA. We are both in our late 20’s so we have plenty of years to go before retirement. Does it make sense for me to switch to PERA, or should we remain “diversified” with a PERA and 401(a)?

    For the “Rule of 90”, does the years_worked * 2.5% apply to your average salary over the years or your final salary at retirement?

  11. I am a 69-year-old retired federal employee with an annuity and no social security benefits. I recently accepted a part-time (30 hrs/wk) position with the state of Colorado as a PERA-covered employee. I plan on working only 4-5 years. Any recommendations about which PERA option would be best for me?

    1. You will pay into the PERA retirement plan whether you like it or not. It comes out of your paycheck automatically, no matter how many hours you work, or for how long. When you leave service, you’ll get options. Working part-time for just a few years isn’t like to provide you any pension benefit worth much. Instead, you can take the funds and roll them into an IRA or other retirement plan

  12. Hi there! I’m a teacher, and have about $10,000 inPERA currently. Other teachers have said that it’s wise to take any money out of PERA and roll it into a Traditional Roth account since PERA is underfunded and will likely go bankrupt in the future. I’m 41. Thoughts?

    1. This is a lot like the people who have been saying (for at least 30 years that I know of) that Social Security is failing and will go bankrupt. They are right. Sort of. If nothing is done, PERA would hypothetically run out of money in 30 or 40 years.
      a) That’s a long time
      b) Something will probably be done.

      If you are teacher and still contributing to PERA you can’t really take your money out anyway, and you shouldn’t want to. The pension you get out of PERA is a very big benefit. If you no longer contribute to PERA, then there is really no reason to leave it there (though there is no reason to rush and take it out either.) You’ll want to roll it into a traditional IRA, not a Roth IRA.

      1. Thank you for this!

        I recently have left the teaching profession after 11 years. I am vested into PERA but I am considering rolling it into an IRA. I also have a 403B that I will definitely be rolling over.

        Every time I call PERA about getting my money out, they convince me to leave it in because I would get a monthly payout for the rest of my life until I (or my beneficiary if he outlives me) dies. It is not much money ($1,400) but it’s steady. Thoughts?

        1. There are two kinds of people in the world. Those who really understand finance, and can clearly and firmly stay on a path that is established without emotionally making changes. Those people aren’t very common. The others would be better off getting a steady income for the rest of their life. I’m not sure how old you are, or if you are also qualified for Social Security, or if you are going to keep working. Take a look at your situation and think about how you want it to go down.

  13. I taught at a Colorado state college for 9 years (10 calendar years). I was not tenure-track and so was not allowed into PERA. I did have a 403b account. However, I also did not pay any Social Security tax during that time. Is that right?

    1. Yes. (I don’t know about the tenure thing) You have to have either Social Security or PERA. The 403b is a lot like a 401k. It’s an individual retirement savings plan, not a pension.

  14. I have 18 months credit in PERA from ten years ago. Now I’m employed again for the state. Do those previous 18 months count towards the five years,or does it start all over again as far as vesting?

    1. Assuming you didn’t take your money out when you left, those 18 months count, but you are not grandfathered under any old rules. In other words, your PERA runs under the current rules, not those for older employees.

    2. I suggest that you contact the source for accurate answers: your Human Resources Department, Benefits Department and…PERA!!

  15. I have about 12 years of PERA service credits with the state. Recently I was offered a position that is in the private sector and has Fidelity 401k options. I’m contemplating if it’s smart or not to leave state employment or if I should stay because of PERA.

  16. Hello! I have about $5,500 in an old Colorado PERA account. I left PERA employment about 3 years ago, and have about 1.5 years of service credit. I initially left my funds in the account since the interest rate was guaranteed, but have come to realize it is only 3%. I’m trying to decide if I should continue to leave it there, or roll it into a new Rollover IRA (I have a SIMPLE IRA with my current employer, but PERA says you can’t rollover into a SIMPLE.) Do you have any advice? I’m about 30 years old, so I have many decades ahead of me before retirement. Im not actively looking to return to public employment, but there’s always the chance that it could happen, in which case picking up where I left off with my service credit would be nice (but maybe the benefit is outweighed by the cost of losing out on higher potential returns in an IRA over the next several years). In any case, if I ever do return to PERA covered employment, I wouldn’t see myself staying there for 10+ years.


    1. There isn’t a lot of benefit to leaving such a small amount in PERA if you never plan to return to state service. Your $5,500 won’t grow any faster there than anywhere else. However, it won’t hurt anything to leave it there either. The rate PERA pays varies based on current interest rates. Previously, PERA has paid 6% or even 7%. If you look around, you’ll notice 3% guaranteed isn’t too bad, but at your age, you would probably do over the long-term by getting that money invested in the markets.

  17. So if I am a teacher in Colorado for 5 years, and then I move to another state to be a teacher, do I get my money + 7% per year upon retirement? Do I get any of the “match” or government’s contributions?

    1. The 7% is “interest” on your account balance. That applies to whatever money you have with PERA when you leave. There will be no additional contributions. Chances are your new state has a different pension program that you would join and begin contributing to instead of PERA, which is a Colorado only program.

  18. How do Pera and SS work if I’ve spent most of my career paying into SS but end my career with Pera? 30 yrs SS/10 yrs Pera. From other articles it’s not good news.

    1. So, it’s complicated. I wouldn’t go so far as to say “not good news” but it does seem a little unfair. Essentially, the way it works is that based on having a PERA pension, they might reduce your Social Security by some. If they do, and by how much is the complicated part. The good news is that a full PERA pension is a WAY better deal than Social Security, and you would much rather have that than even the maximum SS payment in almost every case. The catch to your situation is that with just 10 years, your PERA isn’t going to be a full pension. So, your Social Security might not be reduced as much, but that’s only because your PERA won’t be as high. You’ll want to talk to a PERA counselor. They can help with all of the math.

      1. I have the same question however, I am wondering what if you take out a lump sum for just one month. Will your SS be reduced every month or just that one month?

  19. Thank you for this article – we’re still trying to understand PERA in our new job. So, we’re not able to opt-out of the PERA withdrawl, but can we kind of “cash out” if this job doesn’t last to retirement? Say we’re in PERA job for 5-10 years and move away – is all of that sunk or can we pull out something knowing that we’ll never retire under this plan? It’s just such a crazy huge chunk of our check, knowing that we’ll never use this investment. Any suggestions on how to navigate?

    1. PERA money is your money. It does have tax rules, so “taking it out” means transferring it to another retirement plan, or taking a big penalty. Unlike Social Security it is in a private account for you. You will get statements each year about how much money is in your PERA. If you leave employment, you can cash out the money in your account. If you leave it in there, it will continue to grow at 7% per year. You can take the money whenever you want once you leave employment, but you don’t have to do it right away, or ever.

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