This morning's Boston Globe contains an article by Matt Carroll that purports to highlight an alarming trend in our state pension system -- an increasing number of retirees receiving six-figure pensions. Despite its title, the article doesn't actually document rising pension costs at the system level but it does contain this quote from the always reliable Mike Widmer:
“There is an urgent need for comprehensive pension reform,’’ said Michael J. Widmer, president of the Massachusetts Taxpayers Foundation. “Soaring pension and health care benefits are cannibalizing municipal services.’’
As usual, it is very difficult to disagree with Dr. Widmer. However, as any good policy analyst knows, if one wants to evaluate the costs and benefits of a particular policy, one must compare it to an alternative. In this case the alternative to the state pension system would almost certainly be social security and medicare. So when I read the article I immediately thought, would the state be better off if its employees participated in those two federal programs instead?
Thankfully, MassBudget (aka the Massachusetts Budget and Policy Center) has already examined this issue at some length. See their recent analysis for a very nice summary of the relevant issues and facts.
What I learned from reading this report is that the state's contribution to the pension system is about 23%, the rest comes from employees and investment returns -- BUT the system currently has about $20 billion in unfunded liabilities (largely the results of the failure of the State to make its full contribution and poor investment performance during the recent recession).
The other eye-opening finding from the MassBudget report is that if the state were to switch all employees to the social security and medicare systems it would cost the state more on annual basis to pay the payroll tax it now avoids by opting out of the Social Security system. Of course, if this were to happen the liability for future employees would belong to the federal government rather than the State and employees would pay about half as much (more highly paid employees would save even more but get much less).
As Mass Budget put it,
"One important distinction between public and private sector workers in Massachusetts is that public sector workers are not eligible to participate in Social Security. Thus, state employees and teachers do not contribute the 6.2 percent of their salary toward Social Security. On the employer side, the state also does not contribute 6.2 percent of employees’ salary (up to $106,800) toward Social Security. If the state were to abolish the pension system entirely for new employees and thus be required to participate in Social Security, costs would subsequently increase by about 3 percent of payroll, more than double what it pays now." Source: Demystifying the State Pension System, MassBudget
Of course it is tough to compare the costs given that the benefits that retirees get from both programs are not the same. For the record, I think the state benefits are undeniably better than their federal counterparts but you would expect this to be the case given greater employee contributions.
Now, of course, even though it seems clear the state pension system is more cost-effective in short-run budgetary terms, the full faith and credit of the Commonwealth is behind the $20+ billion in unfunded liability facing the state government and another $10 billion or so for those numerous independent municipal pension boards across the state (yet another strong argument for rolling all municipal workers into the state pension and GIC system). So, in a very real sense, unless the pension fund returns grow rapidly and consistently, this is money the taxpayers owe the current employees.
So while the idea that Massachusetts employees don't pay their fair share is totally wrong, the fact remains that current pension commitments represent a gigantic drain on future state revenues and definitely will limit the "investment" choices the State will be able to make in the future. Don't get me wrong, I'm 100% for the pension (for the record I vest in June), but let's not kid ourselves. The public may be blaming the wrong people but they are right to be concerned about the sustainability of the system in the long run.
That said, it seems clear that the existing system works better for the state in short-term budgetary terms and for workers in terms of the value of the benefits. The problem for all these programs whether federal or state is a long-term one. Lest we forget, the federal pension and health care programs have some significant unfunded liability issues of their own.
Bottom line, there are legitimate concerns about our public pension system in Massachusetts and important debates to be had over how we can deal with the very real and profound challenges we face in a fair and financially sustainable way.
This morning the Boston Globe missed an important opportunity to inform that debate.
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