Reform before revenue, part 2 — pension reform

Pension reform is probably the most fundamental and controversial among the reforms on the agenda this year.  Now seated on the Public Service Committee, I expect to give this area quite a bit of my own attention.

There are several different kinds of pension reform.  Last session we made
changes in how pension funds are administered and invested.  There is still
room for improvement, but most perceive Massachusetts to be doing fairly
well administratively.

The pension reform legislation that we passed in the House last week speaks
primarily to abuses and excesses that have been baked into the rules over
the years:  the rule giving legislators a year of service credit for a
single day of service in a calendar year, the rule allowing temporarily
promoted fire officers to retire at substantially higher disability pensions
if they are injured while acting for a superior, the rule giving legislators
who lose elections a special pension boost, the rule giving employees
pension credit for housing and other in-kind benefits, the rule giving full
pension credit for years of part-time municipal board service (a rule that
benefits me personally) and several other similar excesses.

There was near unanimity, as we passed this bill, on the need to cleanse the
rules.  Public employee union leaders, very active on pension issues, are
very strongly in support of measures which eliminate abuses — they share
the concern for credibility and are also concerned to protect the financial
integrity of the pension system.  Hard negotiations did occur around the
exact wording of the changes limiting what kinds of compensation count for
pension computation purposes.  Overtime is clearly excluded, but some other
components of compensation (routine shift differentials for example) have
always been included.  The goal was to eliminate compensation elements that
could be manipulated to boost pensions or that really were not wages.  It
appears we may have accomplished that in a fair way, but the language will
continue to evolve in the conference with the senate.

The other hard question last week was retroactivity.  Public pensions, once
awarded, belong to a worker in the same way that their house does — they
cannot under the constitution be unilaterally taken away.  The interesting
legal question is when pensions should be considered to have been awarded.
This is genuinely a legal grey area.  In the transportation legislation,
the House took a more aggressive position on transitioning T workers into a
more reasonable benefits regime.  In the pension legislation, the Senate
took the more aggressive position, making most changes applicable to anyone
who had not already retired, while the House grandfathered anyone currently
in service.  I’m hopeful that the conference committees will sort these
issues out in a way that respects the law, but maximizes savings and the
immediacy of reform.

The aspects of pension reform that lie ahead of us relate to the fundamental
economics of the system.  There are issues of equity between public and
private employees and issues of equity between present and future
generations.  Lifelong Massachusetts public employees do not receive Social
Security.  The public pension system is their safety net.  Most make higher
annual contributions than Social Security requires, but they also are able
to receive substantially higher benefits than Social Security provides
(especially for higher earners).  As in the case of Social Security, future
taxpayers will be responsible for covering the deficit if investment returns
from present contributions are insufficient to pay for future benefits.
We’ve made progress towards covering that deficit for pensions by raising
employee contributions, but there is a yawning gap in funding for future
health care benefits.

I am among those who believe that we need to limit taxpayer liability for
the higher pensions and have filed legislation to this end.  Public employee
leaders support this idea, but the hard question is just where the ceiling
should be.

The issues are complex enough — legally and financially — that there is a
lot of confusion and misinformation in most conversations about the issue.
I look forward to playing a part in sorting these issues through.