In my previous Op-Ed, published on Dec. 27, 2023 in the Source and on February 8, 2024 in the Daily News, I proposed for the Government Employee Retirement System (GERS) to transition from a Defined Benefit system to a Defined Contribution system. This transition would shift ownership of risk from GERS to the individual, but I believe it is risk most of us, especially young professionals, would prefer to own as the benefits outweigh the risk by far.
To illustrate this point, I’ve outlined the policy and two different scenarios – a current Tier 2 government employee (like myself), and a younger, potentially Tier 3 (based on my policy proposal), government employee (like a GVI Fellow). Us two government employees meet at a bar. BRAM is playing loudly in the background, but we were still able to have an intelligible conversation.
I begin the conversation by revealing that I, as a Tier 2 government employee, currently contribute $840 per month into GERS. That’s the statutorily required 11.5% of my income (annual salary of $95,000, although deductions only occur up to $65,000 of annual salary). Based on the current structure of the GVI’s pension system, my retirement income from GERS will be $42,088 per year before taxes and deductions. I also shared that I won’t be able to retire until I’m 65 years old (approximately 37 years of service), which is the year I’d be able to claim my pension benefits.
The younger, Tier 3 government employee’s eyes opened widely in apparent shock. They then proceeded to explain their retirement outlook to me as a Tier 3 Government employee.
As a GVI Fellow (fresh out of college), they told me that they currently earn $55,000 per year. As a Tier 3 government employee, they are contributing $423 per month to the GERS’s defined contribution plan (403b investment account with positions in a low-cost S&P 500 index fund). Including the Government’s match contributions, the total monthly contribution is $846.
Assuming the GVI Fellow has a retirement outlook of 40 years (approximately 62-63 years old), their total contributions of $406,080 would be worth $4,695,594 before taxes and deductions! My eyes opened widely in apparent, disgusted shock! I felt cheated and misled as I was consistently told that the GVI pension system was “generous.” They further shared that this account balance would safely provide retirement income of $187,800 per year for the rest of their lives without affecting principal.
This scenario assumes they never increase their income, which is unlikely, and it also assumes the average annual nominal return of the S&P500, which is 10%.
As the BRAM continued to play in the background, I told them I am going to GERS to request an immediate change from a Tier 2 employee to a Tier 3 employee first thing Monday morning!
*As a quick aside, if the GVI Fellow wanted to retire at 52 years old (30 years of service), their investments would be worth $1,745,165, allowing them an annual retirement income of $69,807 before taxes and deductions. With periodic salary increases, they could retire at 52 years old with even more income. If the Government offered a Roth 403b option, that income would be tax free.
After hearing about this amazing employment benefit, I realized that if I was a Tier 3 employee, 10% of my income would be $731 per month. Including the employer’s matching 10% contribution, that would be $1,462 per month being contributed to the 403b investment account with the same financial securities exposure as the GVI Fellow.
With a retirement outlook of 35 years, the total contributions of $614,040 would be worth $2,502,087 at the time of my retirement. This account balance would enable me to safely live off of $100,084 per year for the rest of my life without affecting principal and running out of money.
This assumes I never increased my income, and it also assumes a conservative, nominal annualized return of 7%. Again, the S&P 500 has an average nominal annualized rate of return of approximately 10%.
An annualized nominal return at 10% would be $4,969,032.47, allowing me an annual retirement income of $198,761!
We finished our drink and whined the night away while looking forward to our dignified retirement years after decades of public service.
*Another aside, based on conversations with many current retirees (retired between 10 and 30 years), GERS does not make cost of living adjustments (COLA).
The issues of unfunded pension liabilities is not unique to the Virgin Islands nor the United States; and I continue to believe and know that the Virgin Islands can be a leader in politics, the arts, and general human development as we continue to solve the problems of the day.
This is why I continue to advocate for the GVI to transition our retirement system from a Defined Benefit plan to a Defined Contribution plan as I am proposing. For the people of the Virgin Islands, the greatest benefit of the policy I’m proposing is the potential for the transfer of wealth that can occur once a retiree passes away.
Under our current system, there is no transfer of pension benefits to descendants or a spouse (unless a joint/survivor annuity contract is signed, which comes at a cost and is probably not the common option). Under a Defined Contribution plan, descendants will be able to inherit the retiree’s assets after death.
The GVI is currently the largest employer in the Territory, this would have a vast and lasting impact on the financial health of our society.
The benefit to GERS is administrative. Managing a pension system is extremely difficult. With this policy proposal, risk would transfer to the individual. Although this might scare some people, the benefits far outweigh the risks.
In financial markets, risk is inversely related to time. Additionally, the risk of an unfunded liability would progressively become non-existent. The benefit to the Government is also extremely impactful.
With a 2023 published Full Time Equivalent of 7,254 employees and an average salary of $44,065, the Government could save approximately $49,545,842 per year.
These savings can be used to increase teacher salaries, fix roads, pay brokerage and fund fees, or stabilize the pension system.
Community, what are the goals of this policy initiative?
1) Financial Benefits (Decreasing Government Debt while Increasing Employee Take Home and Retirement Income)
2) Promotion of Long-Term Civic Service
3) Promotion of Local, Generational Wealth-Building
4) Avoiding Economic Collapse due to Government Default on Pension Liabilities
5) Attracting and Retaining Quality and Competitive Human Talent
6) Investment in the Virgin Islands
Time is the greatest factor in building wealth, and this is why we need to act now.
—Malachi Thomas is a community advocate living in the Virgin Islands.
Editor’s Note: Opinion articles do not represent the views of the Virgin Islands Source newsroom and are the sole expressed opinion of the writer. Submissions can be made to visource@gmail.com.
