March 2, 2010
Most of the reforms passed in 2009 and, as well as changes proposed by Patrick in January, focus on cutting benefits. Patrick's proposals include an increase in the minimum retirement age from 55 to 60 for most state workers, a new benefits formula that would base retirement earnings on a worker's highest five years of wages rather than his highest three and a new cap on benefits that would limit payments this year to $85,000. The $5 billion in savings over 30 years estimated by Patrick from these reforms, however, represents just a fraction of the system's unfunded liabilities. Lawmakers will likely need to make deeper cuts in the years ahead to get the system back on track. But they could face stiff opposition from the Massachusetts Teachers Association and other powerful groups representing the state's highly unionized and politically active labor force, as could any attempts to significantly raise employee contribution rates.
The state pension system could also save money by increasing its efficiency and lowering administration costs. Officials could, for instance, consolidate the state's 106 local, county and regional retirement boards into one centralized retirement agency. A centralized statewide agency could offer lower administrative costs than local pension boards by, for instance, eliminating staff redundancies and by decreasing the potential for "sweetheart deals" between local officials and retirement boards, as the Globe has argued. A centralized system might also yield higher investment returns. A 2006 study by the Pioneer Institute found that only six of 104 local pension systems earned returns that were as good as or better than the PRIT with their independent investment funds. The study estimated the cumulative loss to local pension systems from lower investment returns at $1.6 billion over 10 years.
This year's governor's election may actually help the political prospects of pension reform. Fiscal responsibility was one of the main themes of Republican Scott Brown's victorious campaign for the U.S. Senate in January, and voter skepticism toward government spending may carry into November. Governor Patrick, Republican candidate for governor Charlie Baker and independent Tim Cahill have all made pension reform part of their campaign platforms. Cahill focuses on his efforts to close pension loopholes as state treasurer. Baker's proposals largely mirror the cost-cutting plan put forward by Patrick in January.
In the long run, however, the state pension system's financial problems may persist as long as Massachusetts allows policymakers to defer the costs of new benefits to future generations of taxpayers. If legislators vote to increase pension benefits in 2010, the costs of those new benefits will not show up as line items on the 2010 or 2011 budget. Indeed, the state may not realize their full costs until 2040 or 2050. Until Massachusetts and other states can find a way to hold elected officials directly accountable for any new entitlement benefits they grant to state workers, perhaps by adopting pay-as-you-go financing, policymakers will always have an incentive to promise now and pay later.
"It's very easy to burden future taxpayers,” Poftak said. “No one comes back from the future to vote in past elections.”
Charlie Curnow is an Assistant Editor at Advisor Perspectives.
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