State pension system gets an ‘F’
The Urban Institute, a Washington think tank, gives Massachusetts a failing grade in its new study on public pensions, ranking the state the worst in the nation.
The institute cited low funding levels, as well as pension plan designs that it says hurt younger workers and fail to encourage older employees to work longer.
According to the study, Massachusetts receives an "F" for its plans’ funding level, along with three other states -- New Jersey, Pennsylvania, and North Dakota.
The state’s pension system, which covers Commonwealth employees and teachers, was 60.6 percent funded in early 2013. That compares with an average of 74 percent funding across all US states, according to the institute.
"Over the years, they’ve dug a pretty deep funding hole, and that’s getting worse," said Richard Johnson, the project’s lead researcher. Even as Massachusetts has made reforms to its pension plans, most recently in 2012, Johnson said the state still "pushes older workers out the door but doesn’t attract younger workers."
Nick Favorito, executive director of the Massachusetts State Retirement Board, said the report does not reflect recent commitments to improve the funding levels.
Earlier this year, the Patrick administration and leaders of the Legislature agreed to boost funding for the state pension plan over the next three years and beyond, with a goal of fully covering retirement obligations by 2036.
Under the plan, the state would increase its annual contribution to the fund by 10 percent a year for fiscal 2015 through 2017. After three years, the increases would be 7 percent annually.
In terms of plan design, the Urban Institute singles out Massachusetts police and fire employees as having the worst plans in the country.
It says the plans offer little incentive for older workers to stay on the job instead of retiring and beginning to collect benefits at an earlier age. Many retirement benefit systems, including the Social Security system, offer larger payments for participants who start drawing checks at later ages.
The institute also criticized Massachusetts plans because young workers must be employed by the state for 10 years before earning any pension benefits beyond their own contributions and modest interest on those savings.
Carolyn Ryan, assistant director of policy and research at the Massachusetts Taxpayers Foundation, who reviewed the report, said it makes sense to require a waiting period before people qualify for a pension.
"The Urban Institute gives us a demerit for our 10-year investing requirement. We disagree with that," Ryan said.
However, both she and Michael Widmer, who is president of the Boston-based foundation, agreed that the plan was not geared to today’s workers, who are likely to change jobs frequently over the course of their careers.
"’It’s a quandary," Widmer said. "Essentially, you have a plan that doesn’t really reflect the reality of modern employment." A 401(k)-type retirement savings plan might be one way to fix that, they said. But that option raises the inevitable problem of who will support the pensions of older workers.
"The criteria used by the Urban Institute unfortunately tell an incomplete story, particularly for a state like ours with a traditional defined benefit plan," Favorito said in a statement. "In fact, recent pension reform measures -- which have been widely recognized to be both fiscally responsible and fair to workers -- actually result in a lower grade for the Commonwealth using the Urban Institute’s methodology."
Another difficulty for young workers in Massachusetts and some other states, the Urban Institute pointed out, is that those employees do not participate in the Social Security system. Instead, they contribute 9 percent to 11 percent of their earnings to the pension plan -- and that money is returned to them, with interest, if they leave before 10 years.
That means they would not earn investment returns on the money upon withdrawing it, said Jon Carlisle, a spokesman for state Treasurer Steve Grossman. They also would not have lost money if the market declined. The interest rate is currently 3 percent.
"These plans aren’t working well for young workers who won’t spend their entire career in government," said Johnson, of the Urban Institute.
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