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:

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)

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

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 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.

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.

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.

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.

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 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.

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.

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 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. 

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.

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.

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 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 ·
www.mass.gov/budget/governor
For more information contact: contactanf@massmail.state.ma.us (617) 727-2040