Department of Employee Trust Funds - Hot Topic
May 8, 2003
How Financially Sound is the WRS?
The Wisconsin Retirement System (WRS) remains in sound financial
condition despite the impact of a historic three year market decline and unfunded benefit
improvements enacted under 1999 Wis. Act 11.
The WRS ended 1999 with assets, at market value, of $63 billion.
Based on benefit promises of $51.5 billion, WRS assets equaled 122.3% of liabilities. This
balance provided a significant cushion against potential future market losses.
1999 Wisconsin Act 11 increased the liabilities of the system by
approximately $5.5 to $6.0 billion without a plan for any corresponding increase to the
assets. As a result, the funding ratio immediately dropped to roughly 110%.
By the end of 2002, rather than continuing to grow as assumed, the
assets of the WRS had declined as a result of lower than expected investment returns by
over $12 billion to $50.9 billion. Meanwhile, the system's liabilities had continued
to grow to $60.5 billion. This represents a funding ratio of only 84.1%.
The first step in improving the finances of the system is the annual
review of contribution rates. The actuary is currently conducting an actuarial valuation
of the WRS in order to set contribution rates for 2004. The actuary will not attempt to
recover all of our investment losses through the next year's contributions. Instead,
he will consider what contribution increases will be needed over the next thirteen years
to fully fund our benefit commitments. A modest increase in the contribution rate now can
compound to a significant improvement in funded status over a period of years.
In future years, the actuary will repeat the valuation and
contribution rate-setting process. If investment income continues to trail assumptions,
the actuary will continue to increase contribution rates annually to a level that will
fully fund all benefit commitments over a reasonable period of time. Actuarial projections
suggest that in the absence of future investment gains, contribution rates may have to
rise by as much as 3% to 5% in the next five years. If favorable investment markets
produce gains that can offset past investment losses, further contribution rate increases
may be minimized or totally avoided. (It should be noted that contribution rates declined
significantly during the 1990s as a result of significant investment gains)
The WRS annual review of contribution rates provides an ongoing
mechanism for monitoring and adjusting the financial condition of the system. The
long-term perspective used by the actuary allows financial goals to be achieved over time
through gradual incremental adjustments to assumptions and funding.
In summary, while the WRS is currently underfunded, there is no
threat to our ability to continue paying benefits. During 2002 we paid out approximately
$2.6 billion in benefit payments. Our existing assets ensure that we can continue to pay
benefits many, many years into the future. While the recent market decline is cause for
caution and some concern, it is not indicative of a system in dire financial shape nor at
risk of being unable to pay benefits. It is precisely because experience has shown that
there are extended periods of both favorable and unfavorable investment conditions that
the actuary uses a very long-term investment earnings assumption of 8% per year. The
Wisconsin Retirement System continues to be in sound financial shape and able to fulfill
all its commitments to members.