Governor Deval Patrick's Budget Recommendation - House 2 Fiscal Year 2011

Governor's Budget Recommendation FY 2011

Pension Reform

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Governor Patrick    FY2011 House 2 Budget Recommendation:
    Issues in Brief

    Deval L. Patrick, Governor
    Timothy P. Murray, Lt. Governor


Pension Reform Phase 2:  Comprehensive Pension Reform

Providing for a fair, fiscally sustainable and publicly credible pension system for public employees is in the best interests of the Commonwealth, taxpayers and public employees. 

In June 2009, Governor Patrick and the Legislature worked together to enact landmark pension reform legislation that closed loopholes and eliminated abuses, helping to restore public confidence in government and reduce long-term costs to the state’s retirement system.

The abuse and loophole reforms passed in June 2009 were a critical first step in reforming our pension system.  Since then, work has continued, by the Pension Reform Commission and others, to evaluate and identify other changes needed to make the system viable for the long-term.

The Governor’s Phase Two pension reform legislation proposes additional systemic reforms necessary to ensure the sustainability and credibility of our pension system, including provisions which:

  • Update the system to reflect demographic changes, including the fact that people are living and working longer;
  • Eliminate abuses, through anti-spiking measures, extending the number of years on which to calculate pension benefits, increasing scrutiny of legislation benefiting individual employees, and eliminating Section 10 termination benefits; and
  • Address fairness issues, through updating purchase of creditable service and buyback provisions, requiring SJC judges to contribute to their pensions as other state employees do, limiting the annual pension payout the system and taxpayers support for retirees, and increasing scrutiny of special legislation that benefits individual employees.

Pension reform and initiatives to modernize the pension system will generate estimated savings of over $2 billion over 30 years.

Specific Reform Proposals:

Increase retirement age and eliminate subsidy for early retirement.

Group 1 (Officials and general employees): 60-67 (currently 55-65)

Group 2 (Employees with job titles presumably reflecting hazardous duties): 55-62 (currently 55-60)

Group 4 (Firefighters, police officers, and some correction officers): 50-57 (currently 45-55)

  • Given continued increases in life spans, people are working longer and remaining healthier at later ages.  Since 1950, overall life expectancy has increased 9.6. For Social Security benefits, the full retirement age (also called "normal retirement age") is now 67 for people born after 1959.  Our current system does not reflect this reality in the retirement age eligibility provisions. The retirement age ranges for Groups 1 and 2 have not changed since 1957.  Group 4 was added in 1967 and has not changed since then.

Lower system cost by reducing the age factors used in the calculation of a member’s retirement allowance. 

  • The current factors provide a subsidy to those members retiring at younger ages. 
  • This proposal would reduce, but not eliminate entirely, the existing subsidy for early retirement.

These changes can only legally apply to new employees.

Reduce the contribution requirement for employees subject to adjusted retirement age factors.

Reduce the 9 percent contribution requirement currently required of certain employees to 8.5 percent of compensation.

  • This reduction would ensure that as a result of the other changes to the system, employees subjected to the adjusted retirement age factors do not pay more into the pension system than they are likely to receive in benefits.

This change would apply to new employees subject to adjusted retirement age factors.

Expand the number of high years on which to calculate pensions.

Increase the period for averaging earnings for purposes of calculating a member’s retirement allowance from 3 to 5 years.

  • A slightly longer averaging period reduces the incentive to inflate late career earnings and makes it more difficult for employees to “game” the pension system.

This change can only legally apply to new employees.

Pro-rate benefits based on group history.

The retirement allowance for members who have served in more than one group shall be prorated by taking into account the number of years of service in each group.

  • Pro-rating makes employees more willing to accept administrative positions towards the end of their careers, prevents windfalls for people who have only a short period of service in a high group and reduces the ongoing pressure to reclassify jobs.
  • The retirement allowance is currently based on benefits of the group of which an employee is a member at retirement, even if most of the employee’s career was in a group with lesser benefits.

This change would apply to existing employees.

Cap earnings for purposes of calculating benefits. 

Cap regular compensation by limiting it to a percentage of the federal limit which would currently result in an annual pension benefit that can be no higher than $85,000.

  • The State and its taxpayers should only support pensions up to a current value of $85,000 annually for retirees.  Employees will only contribute to the pension system up to the new cap on regular compensation.
  • The average annual state pension for retirees is approximately $26,000.  The $85,000 cap is three times the median US income per person and more than three times the average annual state pension.

This change can only legally apply to new employees.

Limit annual increase on retirement earnings.

Introduce an anti-spiking rule, limiting the increase in pensionable earnings in any year to no more than 7 percent plus inflation of the average of pensionable earnings over the previous two years. This provision would not apply for bona fide promotions or job changes.

  • A pension plan that bases benefits on only a few years of earnings generates a strong incentive for workers to raise earnings in those last years to earn a larger pension than intended by the system. To limit such gaming, many public plans have anti-spiking rules.

This change would apply to existing employees.

Eliminate Section 10 early retirement incentive.

Currently, employees with 20 years of service who are terminated at no fault of their own are entitled to a benefit equal to 1/3 of high three earning years plus an annuity from contributions. In most cases, that lifetime termination benefit is significantly larger than what the employee would have received if not terminated and declines with further increases in age and service.

This change can only legally apply to new employees.

Elected officials repay to rejoin system.

Members who are elected or appointed for a term of years should be required to repay any benefits they received with interest in order to rejoin the system and work five years in order for their benefit to be recalculated.

  • This change would make consistent the treatment of elected or appointed officials with that of other members.


This change can only legally apply to new employees.

Purchase of creditable service

Under existing law, a member re-entering the system or those purchasing service based on activities before pension membership may purchase prior creditable service by paying an amount equal to the accumulated regular deductions withdrawn plus interest or an amount related to earlier employment. However, some members are not required to make such a purchase within a certain period after eligibility to purchase is established. As a result, these purchases often take place immediately prior to retirement. This pattern has the effect of understating the liability associated with the member’s service as well as reducing the investable assets of the system.

  • This change would require members re-entering the system or new members who are eligible to receive creditable service based on work elsewhere to purchase creditable service within one year or

pay the full actuarial interest rate.

This change would apply to existing employees.

Require Supreme Court judges to contribute to their retirement.

The members of the Supreme Judicial Court do not currently contribute to their benefits.  This exception is hard to justify in a contributory retirement system.

This change would apply to existing employees.

Collecting pension payouts from convicted retirees

Currently, retirement board practices and interpretations vary regarding their ability to recover pension benefits issued to retirees who are convicted after retirement of an offense related back to their employment.

  • The applicable retirement board should be able to require repayment of benefits received since the date of the offense, not just since date of conviction.

Allow a retirement board to withhold the processing of a pension or other benefit because an individual has been charged with an offense related to his or her employment.

  • This provision would assist retirement boards in preserving system assets. If a retirement board issues pension payments or a refund of retirement contributions to a member who has been charged with an offense subject to pension forfeiture, it can be placed in the position of having to pursue members to recover such benefits when the member is subsequently convicted of the offense.

This change would apply to existing employees.

Increase scrutiny of legislation benefiting individual employees.

Require the following to be filed with special legislation: an actuarial cost estimate, confirmation of the cost analysis from the public employee retirement commission, and a recommendation from the retirement board. 

  • Special exceptions or benefit enhancements should not be made to individuals beyond benefits provided by the system without thorough and transparent evaluation.

This change would apply to existing employees.

Study employee group classification system.

Establish a commission to review and make recommendations for reform regarding the Massachusetts public employees' group classification system, beginning with consideration of the work by the Blue Ribbon Panel on the Massachusetts Public Employees Pension Classification system.

  • The current group classification includes a number of anomalies and inequities. Addressing the classification system is a key to making the pension system more transparent and fair.

Charge retiree health insurance to prior employers.

Contributions for retiree health insurance should be charged to employing jurisdictions based on the portion of the employee’s service in each jurisdiction (similar to the provision for pensions), with earlier employers charged based on their own contribution rate or the contribution rate of the final employer, whichever is lower.

  • Employees may have spent only a portion of their career in the jurisdiction from which they retire, yet the jurisdiction of final employment is responsible for the full contribution to retiree health insurance. Pro-rating contributions based on time spent in each jurisdiction would allocate the cost more equitably across all the employing entities.
  • Recognizing that jurisdictions pay varying rates toward retiree health insurance, it is recommended that the lower contribution rate should apply for the purposes of the charge-back.

This change would apply to existing employees.

About applying pension law changes to current versus future employees:

State law provides that pension law forms a contract with employees at the time when they begin their public jobs.  The courts have ruled that new laws cannot constitutionally apply to current employees if the new law makes substantial changes in employees' reasonable expectations about their pension rights -- but that new laws that correct abuses or close unintended loopholes can apply to current employees.  We have proposed to apply as many of our reforms as possible to current public employees, in light of state pension law.  Whether an employee has "vested" in the pension system makes no legal difference under state law.

About the State Retirement System:

The average annual state pension for retirees is approximately $26,000.  Massachusetts’ public employees are not covered by Social Security.

The State retirement system is a defined benefit plan, and the proposed reforms are designed to occur within the system we have.  A defined benefit plan, with the adjustments made by the proposed reforms, continues to be the reasonable choice for the Commonwealth for the long-term. 

  • The defined benefit plan assures participants the most secure source of retirement income.
  • State and local governments can adapt to risky outcomes over time, spreading risk more widely and thus making them less costly to bear.
  • In addition, defined benefit plans, as opposed to defined contribution plans, put portfolio management into the hands of professionals, thereby avoiding the widespread tendency of individual investors to make basic errors in investment decisions.

The Commonwealth of Massachusetts’ public employee retirement system provides retirement and disability benefit levels that are similar to those of other states with defined benefit plans and no Social Security coverage for public employees.  Taxpayers are often unaware that more of their taxes are contributing to paying off the system’s large unfunded liability than to paying for the state’s contribution towards the benefits being earned by current workers. In fact, in fiscal year 2008, 77 percent of the State’s $1.3 billion contribution to the State and Teachers’ pensions went to cover the unfunded liability; only 23 percent went to pay the cost of benefits earned by current employees in that year.

In fact, the contributions of more recent hires classified as Group 1 employees (general employees and teachers) cover nearly all of the benefits those employees typically receive.

Prepared by Pam Kocher, Executive Office for Administration and Finance ·
For more information contact: (617) 727-2040

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