Mass. set to make pension changes, including reamortization

September 15th, 2011 at 10:05 am by under Nesi's Notes

Rhode Island’s beleaguered lawmakers aren’t the only ones making major changes to their state pension system this fall – the Massachusetts Senate is taking up a bill of their own today, and the debate across the border sounds familiar.

From The Associated Press (emphasis mine):

The bill … seeks to reduce the state’s $17 billion unfunded pension liability by pushing back retirement ages, closing loopholes and ending perceived abuses in the system.

Among other provisions, the measure would raise the minimum retirement age for most state and municipal employees from 55 to 60 while increasing the minimum age for receiving the maximum pension benefit from 65 to 67. The changes would apply to state employees hired after Jan. 1, 2012.

The bill also would reduce incentives for early retirement and base pension benefits on the average of an employee’s five highest wage-earning years. …

The bill estimates savings of $3 billion for the state and $2 billion for municipalities over the next 30 years. Earlier this year, the Legislature and Democratic Gov. Deval Patrick agreed to extend the schedule for fully funding the pension system from 2025 to 2040 — a move estimated to save the state $800 million in the current fiscal year but with a potential cost to the state of $30 billion between now and 2040, according to [the Massachusetts Taxpayers Foundation's Michael] Widmer.

The bill largely mirrors a proposal filed in January by Patrick, who has called pension reform one of his top legislative priories for this year. One key difference, however, is that the Senate proposal calls for an increase in the base amount for calculating cost-of-living increases from $12,000 to $13,000. …

David Holway, president of the National Association of Government Employees, said the pension contribution rate for state employees has doubled over the last 40 years and they should not be blamed for the unfunded liability.

“State employees have been paying,” Holway said. “The real problem with the pension system is that the commonwealth hasn’t met (its) obligations.”

It’s interesting that Massachusetts’ unfunded pension liability is $17 billion, only $10 billion more than Rhode Island’s roughly $7 billion one. The Bay State still uses an 8.25% investment return forecast, which was the same figure Rhode Island used until April, when Treasurer Raimondo got the Retirement Board to lower it to 7.5%.

Governor Patrick’s plan sounds much closer to what Governor Chafee originally wanted to do – make significant changes to the benefits for new hires to get savings in the future, while stretching out the schedule for paying down the unfunded liability (aka “reamortizing” it). But Raimondo ruled out that approach early on. Apparently, reamortization isn’t as controversial among Massachusetts’ leaders as it among Rhode Island’s.

Also interesting: it’s been mentioned before, but Massachusetts’ cost-of-living adjustment is significantly less generous than Rhode Island’s. It only covers the first $12,000 of a pension, and this bill would only raise that to $13,000; Rhode Island’s COLA cap is nearly triple that at $35,000.

Thank you to the reader (and Massachusetts state employee) who sent this article my way. For a detailed comparison of pension plans in the New England states, check out this Federal Reserve Bank of Boston paper by Richard Woodbury [pdf].

Related: Where’s the bump? How RI’s pension system has changed (June 2)

(photo: David Paul Ohmer/Flickr)

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One Response to “Mass. set to make pension changes, including reamortization”

  1. Paul says:

    Please note that Massachusetts DOES NOT TAX public pensions !!!!!! Unlike Rhode Island, which taxes both public pensions and social security.