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.”
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
Full credit for partial years
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
Judges double pensions
Hockey stick jumps in salary
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.]
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
- 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.”