While the basic structure of the pension system is economically sound, and the fact that the federal social security system has been underfunded is no reason to punish current Masschusetts employees, there are many pension anomalies that annoy taxpayers and merit fixing.
The benefit computation is based on age, years of service and highest three years of earnings. The rules are different for four different groups of employees. Public safety workers can get a full pension sooner than others. Depending on which pension group one is in and one’s retirement age, one get a pension equal to up to 80% of one’s highest three years of earnings. The use of the highest three years creates many incentives for special arrangements — someone who has made relatively limited contributions to the pension system during years of service at one compensation may suddenly be eligible for a disproportionate pension if they can get a high paying job before retirement. (I, Will Brownsberger, turn out to benefit to some extent from this feature of the system — as a Selectman making minimal contributions, I accumulated 9 years of service to add to my 5 years of service as an Assistant Attorney General and my ongoing service as a State Legislator.)
For more on the specifics of perverse incentives, See for example articles by MassINC, “Special deals abound for lawmakers and bureaucrats who get fired.” For a more rigorous discussion of the flaws in the system and suggestions for reform, see the Pioneer Institute’s White Paper on the pension system.
The central logical reform approach to benefit computations would be to apply rules based on one’s lifetime contributions to the pension system. This would still compute a defined benefit, but the benefit would bear a much closer relationship to actual contributions. A pension reform along these lines could also follow social-security in limiting awards above a certain level and assuring a base pension to low-income earners. (Social Security benefits are computed as a share of average social security earnings. The computation runs as follows: In each year of your life, choose the larger of either your social security earnings or the ceiling for social security taxation. Index this upwards for inflation using generous factors specific to SSA. Take the average of the 35th best years and convert to a monthly amount. Then take 90% of the first 700 or so plus 32% of the next 3200 or so and 15% after that up to the maximum taxable monthly earning (roughly $6000) — total max benefit is roughly $2000 month.)
For the majority of employees whose income growth follows a normal trajectory, fair pension reform would have no effect — they are already receiving pensions that are fair in relation to their contributions: The pension plan is, for most employees, primarily a forced savings plan.