State Pension Solutions Unveiled
Thursday, August 18, 2011
A possible major fix to the state pension system emerged yesterday in the latest meeting of the Pension Advisory Group, which is vetting reform ideas for General Treasurer Gina Raimondo.
The proposal, which was unveiled by a representative of the state actuary for pension system, Gabriel Roeder Smith and Company, calls for shifting state workers over to a hybrid retirement system, which combines elements of traditional pensions and 401(k)-style retirement accounts.
GET THE LATEST BREAKING NEWS HERE -- SIGN UP FOR GOLOCAL FREE DAILY EBLASTUnder the proposal, state workers would still contribute 8 percent of their salaries towards their retirement benefits, but only 2 percent out of the 8 percent would go to their pension. The rest would be deposited into a private retirement account. As a result, over a 40-year period, a retiree would earn only 40 percent of their work salary through a pension, as opposed to 75 percent, as is the case today. The remainder of their retirement income would come from the money saved in their private account.
Sweeping changes
Other changes would include the following:
■ Retirement age: Making the eligible retirement age correspond to the system in place for Social Security.
■ COLAs: Changing from a 3 percent cost of living adjustment, or COLA, to a 2 percent COLA, which is dependent on investment returns. Also, the amount of retirement income subject to the COLA would be reduced from $30,000 to $12,000.
■ Vestment in the system: Workers would become vested in the system after five years, rather than ten.
The state’s actuary outlined a number of alternative scenarios for a hybrid retirement system, based on differing employee and employer contribution rates and accrual rates, among other factors.
One of the most controversial aspects of the plan is what the state would have to do to get to a hybrid system. The state would have to re-amortize to 25 years, worker contribution rates would decrease by .5 percent each year until they reached 2 percent, and COLAs would be suspended until the pension system for state workers was 80 percent funded.
Debate begins
Although the proposal was presented as just one scenario of what pension reform could look like, it is already setting the stage for debate as the Pension Advisory Group wraps up its work.
“Today’s meeting highlighted the necessary comprehensive reforms that must be implemented to dig out of this grave pension situation that our cities and the state faces,” said Cranston Mayor Allan Fung, one of the members of the panel. “The reforms discussed, particularly moving out of a defined benefit plan into a defined contribution or hybrid system and the COLA fixes, must be implemented so the burdens don’t unfairly fall on the backs of the taxpayers alone.”
But the head of AFSCME Council 94 described the plan as an insult and a betrayal to state workers.
“As someone who has contributed to the system for 32 years, I personally, as a state employee, find the proposal insulting,” said J. Michael Downey, president of Council 94 and also a member of the panel. Downey recalled seeing signs posted on telephone poles on the way into the meeting that read: “Keep the Promise.”
“My advice would be to keep the promise and commitment the state made to its employees and try to work together to resolve the problems in the pension system,” he added. “The proposal as I saw it today would not be fair. I don’t think it would be fair even for new state employees.” (Downey is pictured at right.)
‘Panic over the unfunded liability’
Tom Sgouros, a former Democratic candidate for General Treasurer, questioned the premises behind the current push for pension reform. “My main issue continues to be that I think that the cost that we’re trying to save has been inflated—that the panic over the unfunded liability is overblown,” Sgouros told GoLocalProv.
Sgouros questioned the state’s current policy, which is to reach a 100 percent funding level for the state pension systems in 18 years. He said the timeframe for paying off the state’s approximate $7 billion unfunded liability should be more like 40 years. Cutting that time in half he said is unnecessarily doubling the cost of the system—making it look more expensive than it really is.
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