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Charlotte Amalie
Friday, April 12, 2024
HomeCommentaryOpen Forum: Retirement and Wealth-Building in the Virgin Islands – A Proposal...

Open Forum: Retirement and Wealth-Building in the Virgin Islands – A Proposal for GERS

I am an ardent believer that government policies and initiatives should be geared towards inspiring and building wealth in our communities. We need to engage with our government in a way that establishes and demands an institutional and organizational value of wealth creation in our community. The Virgin Islands can, and should, be a leader in regional, national, and global politics because we have a providential foundation on which we can build. We can lead the way in providing communities all over the world with solutions to problems that are not unique to us. In the case specific to this article — unfunded pension liabilities.

It is imperative that we continue to address the inherent issues plaguing our local pension system. First, however, I must say kudos to our elected leaders who were able to stave off the impending insolvency of our local pension system. Although I consider the mechanism to be a collateralized debt obligation being used to pay off a different debt, I commend our leaders for being able to work together to avoid the GERS from emergent insolvency. However, the job is not over, and the accomplishment is not something upon which we should rest our laurels.

A tourniquet on an arm with a gunshot wound does not fix the problem of the gunshot wound; and it certainly does not address why a gun was fired in the first place. It only provides time for the victim to get more serious medical attention. The special purpose entity that was created to provide funding to the GERS does not address why GERS found itself needing funding. We need to come up with a plan to avoid a future threat of insolvency. As a younger Virgin Islander, who typically would be considering retirement around the same time the special purpose entity’s funding note would end, I’ve decided to join the conversation and provide a solution through this article.

Based on the current state of our pension system, the benefits that would be due to me in retirement, assuming I become a vested member, are not firm. As it stands, our local pension system does not inspire long-term public service with the government of the Virgin Islands; and it most certainly does not inspire young Virgin Islanders to return home to explore a career with our government. We need to consider this proposal as a means of building wealth in our communities, and as a policy mechanism to fight brain drain and inspire brain gain.

I propose we transition from a defined benefit plan system to a defined contribution plan system. This transition would benefit GERS, the central government, and families. With a defined contribution plan, employees would be able to invest their contributed income, track its performance in the markets toward their desired age of retirement, enjoy tax-advantaged distributions or contributions, and, this is the most important part, pass the wealth generated from their investments down to their beneficiaries. Currently, children of retirees are not able to inherit their parent’s pension benefits. Under a defined contribution plan, however, descendants, spouses, or other beneficiaries would be able to inherit potentially six-figure and seven-figure accounts based on their parents’ contributions and the growth of those investments. The new ability to pass down wealth is the most impactful aspect of this proposal.

Concerning the benefits to the government, instead of the current 23.5 percent employer contribution match from the GVI to GERS, the government can match up to 10 percent of employees’ contributions. Personally, I’d prefer the match to be 100 percent vested at the start of employment, but vesting can occur at a later date or even be tiered with the passage of time in government service. With a transition like this, and the continued funding from the matching fund note, the government could enjoy significant savings — savings that don’t involve incurring debt. Also, the realized savings could be used to supplement the funding of the current pension liabilities.

The new administrator of GERS described the pension system as the people’s bank. I posit that the people would prefer if the pension system functioned as an investment bank as opposed to a commercial bank. Instead of offering loans, most of which erode wealth-building potential, the pension system can offer safe financial securities in a variety of retirement accounts (i.e., 403b and Roth 403b) in which employees can invest. GERS and the government would need to explore the best way to do this, but I suggest the easiest route of GERS investing contributions in target date exchange traded funds. This way, GERS wouldn’t need to expend time and resources figuring out what types of investments to purchase with contributions. I, for one, would prefer to not have my contributions for retirement invested in real estate. The benefit of this transition to GERS would be transferring the risk of investment performance on to the employee and retiree. The risk of an unfunded liability owed by GERS would no longer exist. Given the past performance of the United States and global markets, it is a risk I believe most people would be willing to take to aid in the wealth-building activities of their families.

To simplify this transition, a third tier of employment (Tier 3) can be established. Current employees in Tiers 1 and 2 who’d prefer to transition would be allowed to transition, or decide to stay in their current tiers. Moving to the newly created Tier 3 should be available until Tier 1 and 2 employees no longer exist. Moving from Tier 3 to a previous Tier should not be offered as a possibility.

The fact that my contributions to GERS are so high, but I don’t get to enjoy the growth potential of the investments, is disheartening and does not inspire long term employment with the government. I am constantly thinking about how much more wealthy I, and my descendants, would be if I could invest my contributions to GERS and also enjoy the power of compounded market growth — not only as a means of avoiding the risk of sliding in to poverty during retirement, but also as a means of building generational wealth by being able to pass down my retirement benefits. Virgin Islanders dedicated to public service deserve these forms of opportunities through their employment with our government.

It is widely understood that GERS currently operates as a “pay-as-you-go” system. However, the system was not designed this way, and to continue to operate as such would be an affirmative decision to ignore the problems that currently plague the system. Transitioning to a defined contribution plan needs to be considered and executed sooner than later. The funding note, save for a few years, will cover the annual liabilities of the system. As time goes on, and more employees opt to be Tier 3 employees, the amount of the total liability will decrease. There shouldn’t be a threat of unfunded years because the matching funds note coupled with the savings from the decrease in employer match should cover current liabilities. I admit that the government and GERS would need to procure actuarial and financial services to explore the details of this route. However, as major and complex a transition it may be, it is a transition that needs to happen in our territory.

Again, the most important and impactful aspect of this proposal is the fact that retirees, who are mostly local Virgin Islanders, would have another avenue to pass down wealth to their descendants and heirs. They would have another avenue separate from expensive and dubious insurance policies, of which most of the proceeds probably go to paying off debt. Based on my very rough calculations, most retirees contribute between close to $100,000 to about $300,000 (which at retirement could be worth between $600,000 to $2,000,000 based on different variables) to the system over the span of their career. Of those contributions, they have no ownership of the gains and growth from investment under the current system. The system does allow for descendants to inherit the contributions the retiree contributed. However, retirees are paid their total contributions within 3-5 years of retirement. Most retirees enjoy more than five years of retirement. This means that retirees aren’t able to pass down their contributions nor the investment growth from their contributions to their descendants. Additionally, spouses are only able to inherit pension benefits if they elect a right of survivorship contract at retirement. The cost of that contract is about half of the monthly benefit payment. I believe most retirees sign single annuity contracts to maximize the amount of their monthly pension payments. That means their spouses do not inherit pension benefits. This is a hinderance to wealth building in our community, and it needs to end sooner than later.

As the largest employer in the territory, our government should play a part in facilitating wealth creation in our community.

— Malachi R. Thomas, St. Thomas

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