Russell Moore: Don’t Gut Pension Reform
Monday, December 30, 2013
The story is about a group of roughly 1,100 retired state workers who fell into a loophole after pension reform was implemented. Several years ago, these particular workers took an option that allowed them to receive increased pension payments prior to achieving the social security retirement age in exchange for similar reductions in their pensions once they reached retirement age.
The problem for these retirees is that cost-of-living-allowances (colas) were suspended by the pension reform of 2011, and these particular folks were counting on their colas to make up for their decreased pension payments after retirement. To rectify the situation, the state retirement board is looking to give these retirees to opt out of that program and take smaller cuts than they would have had they waited to retire.
Work for 30 years, collect for 30 years?
That's all well and good. But what’s most interesting about the story was the anecdote. The gentleman referenced in the story to illustrate the plight of these thousand or so folks was a “maintenance supervisor” at the University of Rhode Island. He retired at age 51 in 2008, after having worked 32 years for the state. He currently receives a pension worth just over $50,000.
That means he’s receiving a pension worth just a few thousand less than the median income in Rhode Island, from the state taxpayers.
When people here about millions over millions in unfunded liabilities and the pension fund having had only 60 percent of its obligations funded, their eyes glaze over. But when people are alerted to the idea of someone who worked for the state for 32 years and could retire at 51 and receive a pension upwards of $50,000, with cost-of-living adjustments forthcoming, support for pension reform grew.
None of this should be a criticism of this particular worker, or any of the workers for that matter who simply followed the rules that were laid out them and worked hard for the state.
But let’s keep in mind that the private sector, which funds the public sector, doesn’t offer its workers pensions at all. They’re a thing of the past because they weren’t economical. Yes, this particular individual see his pension cut once he reaches the social security age, but the larger problem is how expensive and generous the system was prior to pension reform.
We can't have a public sector that pays better wages, better benefits, and contains more job security than the private sector. When that's the case, everyone will be incentivized to try and work in the public sector. That's what fosters an environment of corruption.
Let’s face it: the pension system was a dinosaur prior to 2011. It was designed in an era when the average lifespan of the average Rhode Islander was far lower than it is today. If a person was only expected to live to 65 years old, the system made sense for a person to retire at 50 and collect for 15-years. But when people are living well into their eighties, the defined benefit system became unaffordable.
Further, people are not only living longer, they're living healthier lives. There are plenty of 51-year-olds that finish marathons and other magnificent athletic accomplishments. If people can do marathons at 50, I'm pretty sure they can work well past that age as well.
An easy copout regarding the pension system is to blame politicians from the past for not funding it. Yes, the system should’ve been properly funded. But what’s not being acknowledged is the fact that the reason it wasn’t funded was because it was so darn expensive.
Thankfully, the state legislature made the system more affordable for taxpayers and therefore more secure for employees by raising the retirement age, suspending cost-of-living allowances, and introducing a 401k-style plan to modernize the system and make it more portable for employees.
But what makes all this relevant is the fact that the public sector unions are currently suing the state to overturn the landmark pension reform bill of 2011. The public sector unions are currently in negotiations with Governor Lincoln Chafee and General Treasurer Gina Raimondo to settle the suit.
What's at stake is the very spirit of pension reform.
Should Chafee and Raimondo cave and gut pension reform, Rhode Island will find itself behind the financial 8 ball.
None of this is to say that there isn't room for some concessions. The most reasonable idea came from former General Treasurer Frank Caprio, who is also currently a candidate for the same office. Caprio's plan would reduce the significant fees (more than $50 million) paid to Wall Street Fat Cats and Hedge Fund Cowboys and use the savings to partially reinstate colas. A reasonable compromise like this one would also prevent the danger that a judge throws out the pension reform law in its entirety.
That would be a catastrophe.
There's only so much money
There’s been a big debate raging on blogs and in social media about Gubernatorial candidate and Providence Mayor Angel Taveras’ plan to create and statewide kindergarten program for 4-year-olds. Specifically, how the plan would be funded is the point of contention. Money is fungible, and without pension reform, there would have been very little, maybe no money to fund the progressive causes like pre-kindergarten. The costs of the ballooning system would have eaten up all the money.
Unfortunately, we can’t have our cake and eat it too. In the upcoming year, state leaders need to stand firm on pension reform or else we won't have the capital we need to fund the necessary social programs.
Timeline - Rhode Island Pension Reform
GoLocalProv breaks down the sequence of events that have played out during Rhode Island's State Employee Pension Fund reform.
Governor Don Carcieri makes pension reform a top priority in his emergency budget plan. His three-point plan included:
1. An established minimum retirment age of 59 for all state and municipal employees.
2. Elimination of cost-of-living increases.
3. Conversion of new hires into a 401(k) style plan.
See WPRI's coverage of Carcieri's proposal here.
Rhode Island's state administered public employee pension system only held 48% of the assets to cover future payments to its emplyees.
"This system as designed today is fundamentally unsustainable, and it is in your best interest to fix it" - Gina Raimondo
Check out Wall Street Journal's coverage here.
Gina Raimondo defeats opponent Kernan King in the election for General Treasurer of Rhode Island using her platform to reform the structure of Rhode Island's public employee pension system. She received 201,625 votes, more than any other politician on the 2010 Rhode Island ballot.
Raimondo leads effort to reduce the state’s assumed rate of return on pension investments from 8.25 to 7.5%.
Her proposal includes plans to suspend the Cost of Living Adjustment (which allows for raises corresponding with rates of inflation for retirees), changing the retirement age to match Social Security ages, and adding a defined contribution plan.
Raimondo releases “Truth in Numbers”, a report detailing the pension crisis and offering possible solutions. She continues to work to raise public support for her proposal.
"Decades of ignoring actuarial assumptions led to lower taxpayer & employee contributions being made into the system." - Gina Raimondo (Truth in Numbers)
Read GoLocalProv's analysis of the report here.
Read the Truth in Numbers report here.
Governor Lincoln Chafee and General Treasurer Gina Raimondo present their pension reform legislation proposal before a joint session of the General Assembly.
“Our fundamental goal throughout this process has been to provide retirement security through reforms that are fair to the three main interested parties: retirees, current employees and the taxpayer…I join the General Treasurer in urging the General Assembly to take decisive action and adopt these reforms.”- Gov. Lincoln Chafee
Head of Rhode Island firefighters’ union accuses Raimondo of “cooking the books” to create a pension problem where one did not exist. Paul Valletta Jr. states that Raimondo raised Rhode Islanders’ assumed mortality rate to increase liability to the state, using data from 1994 instead of updated information from 2008, and lowered the anticipated rate of return on state investments.
“You’re going after the retirees! In this economic time, how could you possibly take a pension away?” Paul Valletta Jr (Head of RI Firefighters' Union)
Read more from the firefighters' battle with Raimondo here.
Check out the New York Times' take on RI's pension crisis here.
November 17, 2011
The Rhode Island Retirement Security Act (RIRSA) is enacted by the General Assembly with bipartisan support in both chambers. RIRSA’s passing is slated to reduce the unfunded liability of RI’s pension system and increase its funding status by $3 billion and 60% respectively, level contributions to the pension system by taxpayers, save municipalities $100 million through lessened contributions to teacher and MERS pension systems, and lower the cost of borrowing.
Read more from GoLocalProv here.
November 18, 2011
Governor Lincoln Chafee signs RIRSA into law. According to a December 2011 Brown University poll, 60% of Rhode Island residents support the reform. Following its enactment, Raimondo holds regional sessions to educate public employees on the effects of the legislation on their retirement benefits.
Read about how Rhode Islanders react to RIRSA here.
Raimondo hosts local workshops to explain the pension reforms across Rhode Island. She also receives national attention for her contributions to the state’s pension reforms. The reforms are given praise and many believe Rhode Island will serve as a template for other States’ future pension reforms.
Read about the pension workshop here.
Read Raimondo's feature in Institutional Investor here.
March - April 2012
Raimondo opposes Governor Chafee’s proposal to cut pension-funded deposits. She continued to provide workshops on the pension reforms.
December 5, 2012
Raimondo publicly opposes Governor Chafee’s meetings with union leaders in an effort to avoid judicial rulings on the pension reform package. In response, Chafee issues a statement supporting the negotiations.
Read more about Raimondo's opposition here.
Read about Chafee's statement here.
Led by the Rhode Island State Association of Fire Fighters, unions protest the 2011 pension reform outside of the Omni Providence where Governor Lincoln Chafee and General Treasurer Gina Raimondo conduct a national conference of bond investors.
Read about Raimondo's discussion of distressed municipalities here.
The pension plan comes under increased scrutiny as a result of the involvement of hedge funds and private equity firms. Reports show that $200 million of the state pension fund was lost in 2012.
"In short, impressive educational credentials and limited knowledge of investment industry realities made Raimondo ideally suited to champion private equity’s public pension money grab." - Ted Seidle (Forbes)
Read GoLocalProv's coverage of the State Pension Fund's losses here.
Read Ted Seidle's criticism of Raimondo in Forbes.
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