Pioneer Institute report on the pension system

This page contains informal notes on the Pioneer Institute White Paper titled “Public Pensions: Unfair to State Employees, Unfair to Taxpayers”  .

  • 176,000 employees; 96,000 retirees — state employees and teachers.
  • Complexity of the law and regulations; complexity of the governance — multiple boards.
  • Problem is the opportunity for gamesmanship created by the rules — unfair to peers and taxpayers.
  • Recommends requiring pay-as-you-go for any legislative changes and “tying benefits more closely to contributions.”

 

Structure:

     Increased contribution levels make the system profitable to the state as to new employees  

          (if pensions are viewed in isolation from disability and health insurance).

               <5 years — contributions returned with no interest

               <10 years — modest interest

               >10 years — gain or loss depending on details

     Median retiree in 2005:  58 years old, pension $27,000 after 22 years of service. 

          Only 15% have pensions over $50,000.

     Unfunded liability = $2,000 per person in MA (function of investment returns as well as actuarial)

           17th largest unfunded liability per capita

           14th lowest percentage funded


Table 3: State Employees Retiring in 2005
                              Median Median Median % greater 

Description Number Age     Service  Payment than $50,000
All           1,295        58.5      21.8     $26,958   14.4%
Group 1     799         60.0     20.2     $19,691   13.1%
Group 2     225         60.3     22.6     $32,647     8.0%
Group 3     52           55.2     27.4     $55,038   65.4%
Group 4     219         53.5     23.8     $32,814   13.7%
(Source: PERAC disclosure)

 Troubling Features — Years of Service

     Years of service add-ons

        Early retirements

       Retirement plus

       Full credit for partial years 

     Eligibility expansions

       Buybacks of other service

       Local part-time service

     Legislative special acts (dependent on favors)

     Early elibility for firings

 

Troubling Features — Top Three Years

     Boosts by including benefits

     Multiple jobs

     Judges double pensions

     Hockey stick jumps in salary

        Longevity bonuses

 

Troubling Features — Classification inequities

      Legislative special acts for groups or individuals

      Group jumping near end of career

      

Troubling Features — Edge effects at age thresholds.

 

“The state pension system has these failings:

  • It treats employees inequitably
  • It burdens future generations of taxpayers
  • It conceals the costs of decisions
  • It distorts incentives

• It reduces confidence in the system”

 

 

NOTE:  PEGS COST OF ALL PROBLEMS TOGETHER AT “MORE THAN $125 MILLION”

    ($3 Billion on liability).  [This is a minor issue financially in comparison to health care cost increases.]

 

Solutions

  Cap at $100,000 — affects only 2 employees in 2005 [this statement appears to be limited to state and teachers retirement system?]

 

“A number of more thoughtful modifications could address the most serious defects in
the retirement system.27 Two major reforms would address the majority of the problems:

  • Enact pay-as-you-go language to require any change in benefits to be funded in full

within three years. This would clarify the costs of legislative changes to Chapter 32
and reduce the incentive to push costs onto future taxpayers. It would discourage
ERIPs, moving employees to higher groups, and pension enhancements such as
Retirement Plus.

  • Tie benefits more closely to lifetime contributions. For example, an employee’s pension

could be limited to no more than a multiple of the total contributions and
investment earnings. This change would stop a large salary increase late in one’s
career from inflating pension benefits.

 Smaller reforms that would deal with other aspects of unfairness include the following:

  • Pro-rate pensions based on tenure in each group to eliminate large windfalls based

on only a short service in Groups 2, 3, and 4.

  • Limit the definition of regular compensation to pure salary.
  • Eliminate “Section 10” termination benefits.
  • Eliminate the favorable definition of elected official’s creditable service and the ability

to buy service for unpaid work.

  • Reduce the jump in the Group 2 benefit rate at 55, and more generally match benefit

rate increases to life expectancy.
• Eliminate separate contribution rates and benefit calculations for teachers and judiciary.”

Published by Will Brownsberger

Will Brownsberger is State Senator from the Second Suffolk and Middlesex District.