Dean Baker: Raimondo-Chafee pension ideas look ‘fairly harsh’September 21st, 2011 at 6:00 am by Ted Nesi under Nesi's Notes
Baker is co-director of the Center for Economic and Policy Research in Washington and famously warned about the housing bubble as early as 2002. Last winter, he released a study arguing that most states’ pension shortfalls “appear easily manageable.”
Over the weekend, Baker emailed me his thoughts on the pension changes Treasurer Raimondo outlined last week on WPRI 12′s “Newsmakers”:
This seems to me to be fairly harsh, especially to retirees.
Asking people to do without cost-of-living adjustments (COLAs) is actually a big cut. This really is a contractual obligation. I don’t know the specific wording in the workers’ contracts, but obviously everyone understood the COLA as part of their pay package. To say that retirees “won’t get a raise” is just a cynical effort at confusing the issue. This is a cut, since it means that the pension benefit will not go as far next year as it does this year, and there will be even further cuts for as long as the freeze is in effect.
I understand that the state is experiencing serious financial strains, but I wonder if it is making similar cuts in payments to private contractors. It seems that your treasurer is taking it out of the hides of workers essentially because she thinks she can. It is also important to recognize that by focusing on full funding she has set an artificially high bar. Usually an 80% funding ratio is considered acceptable. To get to 80% would only require half as much additional revenue or cuts as her $7.3 billion target.
One final point, and this may still be up in the air: if cuts are made to pensions it would be much fairer to focus on higher-end earners and also to make near retirees share in the burden, not just current retirees. Specifically, if a COLA freeze is in place for four years, that amounts to roughly a 10% cut in benefits for those already retired. Those hardest-hit will be those who have just retired, who may get this lower benefit through a long retirement.
On the other hand, if someone retires in four years, after the COLA freeze is over, then this person will get full benefits, as though there never had been a COLA freeze. It would make more sense to distribute these cuts over current and near retirees so that the full burden is not felt by current retirees.
It would also be a simple matter to structure the cuts to be progressive. For example, the full COLA can be given on amounts up to $10,000, a half COLA $10,000 to $20,000, and no COLA on pensions above this amount.
The state really owes its workers a lot for being willing to accept less than the pension that they are owed. (Maybe it was too generous, but states pay too much all the time for goods and services; they don’t generally have the opportunity to come back years later and retake their payments.) It should have an obligation to ensure that people suffer as little as possible as the result of the incompetence of the state’s elected officials.
In a follow-up email, Baker added that he was “sorry to see that the state seems to be moving away from defined-benefit pensions.” (Raimondo has suggested capping the guaranteed pension and augmenting it with a 401k-style account.) “This is a way to give a benefit that is of great value to workers (a guaranteed pension) at little cost to the state,” he said. “I can’t see why it would want to throw this away.”
• Related: Josh Barro calls Raimondo-Chafee pension ideas ‘very promising’ (Sept. 16)
(photo: Center for Economic and Policy Research)