An aging population and the end of a generous government pension plan are putting Puerto Rico in a precarious financial position. The country’s options for economic recovery involve either finding ways to grow its economy or raising taxes on working people. Residents may be forced into retirement earlier than they had planned, which will leave some with no income while others could struggle financially after retiring at an older age.
Retiring in Puerto Rico is a decision that many people make, but it can also be difficult to know what the pros and cons are. Here are some of the things you should consider before deciding whether or not to retire in Puerto Rico.
Even once the bankruptcy is over, Puerto Rico’s lengthy history of failing to fulfill its pension payments is anticipated to haunt the US territory.
A federal court is considering a bankruptcy reorganization that would eliminate defined-benefit retirement schemes that cover tens of thousands of current teachers and judges in Puerto Rico. The pension benefits that public employees have already accrued will be recognized when they retire, but current employees will not be able to accumulate any more.
These steps would help narrow a $55 billion financing gap between the retirement benefits due to Puerto Rico’s public employees and the funds set aside to pay them. Active teachers and judges will be transferred onto defined-contribution retirement systems similar to 401(k)s as part of the bankruptcy deal, terminating the defined-benefit formulas in place when many of their careers started. The retirement age would be raised, postponing the time when benefits could be accessed.
Puerto Rico’s pension system will continue to burden both its workers and its diminishing taxation base until it is fixed. The bankruptcy plan fully funds specified benefits that have accumulated over the last several decades, when legislators habitually granted pension improvements and other retirement benefits without enough financing.
“Teachers who were near to retiring will now have to work longer years in order to retire with less money.”
— Luis Colón Santos, a San Juan, Puerto Rico, teacher
For over 16 years, Luis Colón Santos has worked as a teacher in Puerto Rico. The 40-year-old San Juan resident’s monthly wage was $1,650 when he began. He has now obtained four teaching licenses and is currently working on his PhD in education. He is currently paid $2,010 per month.
He claimed he was expecting to get $1,400 in monthly pension payments when he retired at the age of 55. If the bankruptcy plan is granted, he will have to wait until he is 63 years old to retire and will earn little more than $600.
“Teachers who were near to retiring would now have to work longer years in order to retire with less money,” he stated.
Although municipal bankruptcies are uncommon, cities, counties, and other minor public organizations in the United States have utilized bankruptcy to decrease pension commitments, bond debt, and other financial responsibilities. About half of states allow towns to declare bankruptcy, potentially pitting retirees against creditors in a battle for scarce resources. Elected leaders may feel pressure to uphold pension promises, particularly those that have already been made.
“As a legal issue, it is widely accepted that pension payments may be cut in bankruptcy.” But I believe what we’ve seen in these huge municipal bankruptcy cases is political pressure not to do that,” said Amy Monahan, a law professor at the University of Minnesota who has examined legal concerns surrounding public retirement.
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Bondholders in Puerto Rico have agreed to write-downs that would reduce anticipated debt payments from $90.4 billion to $34.1 billion under the island’s bankruptcy plan, which experts expect to be approved in the coming weeks. For years, the oversight body that guided the territory through its budget crisis urged that yearly pensions exceeding $18,000 be cut as well. According to court documents submitted by an official committee of pensioners, the majority of public retirees in Puerto Rico get monthly payments of less than $12,000 per year.
Last year, Gov. Pedro Pierluisi and legislative leaders refused to approve a bondholder agreement unless accumulated pensions were preserved, a concession the oversight board agreed to in October as the restructuring took shape.
The National Association of State Retirement Administrators’ Jeannine Markoe Raymond stated, “People have already provided the service, and this is part of the contract with them.” “Whether or not the government has put aside money to prefund the benefit, it is still due.”
Teachers and supporters protested changes to public pension schemes in San Juan, Puerto Rico, in March 2017.
thais llorca/European Pressphoto Agency/Thais llorca/European Pressphoto Agency/Thais llorca/European
If the bankruptcy plan is approved by the court, active teachers and judges would still have their pension accruals halted. Teachers’ unions and judges’ organizations in Puerto Rico voted against the restructure and fought it in court, citing the mid-career change in retirement formulae as a reason for their opposition.
The oversight board’s executive director, Natalie Jaresko, said pensioners aren’t to blame for Puerto Rico’s budget problem, which stems from decades of underfunding of pensions by past administrations. However, she claims that without the benefit freeze, Puerto Rico would confront billions of dollars in extra, unpredictably high expenses, rendering the restructuring plan unworkable.
Christmas and summer bonuses, medical contributions, post-hoc cost-of-living hikes, early retirement, and personal loans for homes and cultural vacations have all been introduced to retirement packages by elected officials since the 1950s. Employer payments, which were mandated by law, frequently fell short of what was needed to keep pension systems afloat as legislators diverted their attention to other issues.
“These are programs that effect people over a long period of time, but they’re being managed by individuals whose time frames are from now until the next election,” said Andrew Biggs, a member of the oversight board and senior fellow at the conservative American Enterprise Institute.
Beginning in 1990, reforms reduced retirement benefits for newly recruited employees. However, such modifications did not address the unfunded obligations arising from older members, many of whom could retire at 55 with 30 years of service and lifetime benefits of 75 percent of their greatest annual incomes provided they worked for 30 years. A 2013 pension revision that was partly rejected in court resulted in further reductions in retirement payments.
With pension trust funds exhausted, Puerto Rico’s budget includes a line item for retirement benefits, which is estimated to cost $2.3 billion this fiscal year. Under a compromise struck between the oversight board and Mr. Pierluisi, early retirement and other pay and benefit schemes for police officers, teachers, and others might be expanded after the bankruptcy is complete. According to the governor, the government would not replace staff who retire early in order to save money.
Blanca Paniagua has been receiving a $1,200 monthly pension since retiring from a nearly three-decade career in public agencies in 2000, but she now depends on her son for rent assistance.
The Wall Street Journal’s Jose Jimenez Tirado took this photo.
Puerto Rico isn’t the only place where retirement responsibilities are spiraling out of control. After two decades of dismal market returns, lower-than-necessary government and worker payments, and losses during the 2007-09 financial crisis, pension costs have risen for many other U.S. towns and states.
Some states, such as Illinois and New Jersey, are also significantly in debt due to pension and bond obligations, but federal law prevents them from declaring bankruptcy. According to Moody’s Investors Service, the most heavily indebted major U.S. city, Chicago, which lacks legislative jurisdiction to declare bankruptcy, has $11 billion in bond debt and $53 billion in net pension obligations.
“I’m happy that our pensions aren’t being lowered, since it would have a significant impact on my life.”
— Blanca Paniagua, a retired woman who lives in Carolina, Puerto Rico
Investors in the larger municipal bond market are unconcerned. The demand for municipal debt and its tax-free returns far outnumbers supply. Since Puerto Rico filed for bankruptcy on December 22, the S&P Municipal Bond Index has climbed 19 percent. As the bankruptcy deal has come together, some Puerto Rico debt has recovered, with prices on general-obligation bonds issued in 2014 increasing to more than 86 cents on the dollar as of Dec. 10 from lows of 21 cents in 2017.
Blanca Paniagua began her career at the Treasury Department of Puerto Rico in 1969 as an accountant before moving on to the territory’s nutritional aid program. She has earned a $1,200-per-month pension since retiring in 2000, according to her, a payment that will be unaffected by the bankruptcy. The 80-year-old Carolina resident expressed her gratitude, explaining that her pension barely covers the bills of power, gas, and phone service. In order to pay her rent, she enlists the help of her son.
“I’m happy that our pensions aren’t being slashed, since it would have a significant impact on my life,” she remarked.
—This article was co-written by Heather Gillers.
Andrew Scurria, Sebastian Pellejero, and Soma Biswas may be reached at [email protected], [email protected], and [email protected], respectively.
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The “american retirement communities in puerto rico” is a term that refers to the retirement of American citizens living in Puerto Rico. This article will discuss the history, the current status, and what can be done about it.
Frequently Asked Questions
How much would it cost to retire in Puerto Rico?
A: It is impossible to give you a specific answer for prices in Puerto Rico because the cost of living varies so much.
How much money do you need to live in Puerto Rico?
A: In Puerto Rico, the cost of living is very low and people who are employed can easily get by with $500 USD a month.
Is Social Security taxable in Puerto Rico?
A: Social Security is considered taxable income, and the same as any other pension or retirement plan.
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