Massachusetts Public Pensions Stingiest in the Country!!
By Alicia H. Munnell
Talk to business people in downtown Boston about Massachusetts’ public pensions and they will go on endlessly about how expensive these plans are and how they should be reformed. Truth be told, these plans have been reformed to death and now are the cheapest in the nation. I should know; I chaired the Blue Ribbon Panel on Massachusetts Public Employees’ Pension Classification System in 2006 and the Special Commission to Study the Massachusetts Contributory Retirement Systems in 2009. The area where these plans deserve failing marks is their financing. Be mad at the politicians, not at public employees.
Massachusetts has two state-administered plans, the State Employees’ Retirement System and the Teachers’ Retirement System. Massachusetts ties with Colorado for having the cheapest retirement system in the country. Three factors explain why it is so cheap. First, public employees in Massachusetts are not covered by Social Security, which means the state does not pay the 6.2 percent of payrolls that other employers pay for Old Age, Survivors, and Disability Insurance. Second, despite having no Social Security protection, the normal cost — the cost of accruing benefits — of the Massachusetts plans is below the national average for state-administered plans. And third, Massachusetts public employees pay a much higher percentage (SERS — 70 percent, Teachers — 82 percent) of normal costs than most other public employees.
The bottom line is that, while taxpayers in other states are paying an average of 14.2 percent of payroll (6.2 percent for Social Security and 8 percent for public pension costs), taxpayers in Massachusetts are paying less than 3 percent of payroll for public employee retirement benefits. Thus, in terms of benefits, the Massachusetts plans serve the taxpayer very well.
The flip side of that, of course, is that Massachusetts plans do not serve public employees as well as plans in other states. A recent study from the Urban Institute, a Washington think tank, gave the Massachusetts plans failing grades on four out of five benefit criteria. Massachusetts received low marks on benefits for young and short-term workers because of 10-year vesting and high employee contributions. Regarding older or long-term workers, Massachusetts received an “F” for encouraging older workers because benefits are capped at 80 percent of earnings and only partially inflation-protected.
Many of these benefit shortfalls could be eliminated by providing Social Security coverage as is done in most other states. Such coverage would ensure that young and short-term workers would leave with some retirement credits, that older employees would face incentives to keep working, and that retirees would enjoy full inflation protection on their basic retirement income. Social Security coverage, however, would cost the state 6.2 percent of payrolls.
Turning from benefits to funding, Massachusetts has done a miserable job. In Massachusetts’ defense, the state only started funding in the early 1980s, so the state has been promising benefits for eight decades and funding for three. Not surprisingly, it entered the century with a substantial unfunded liability.
But since 2000 the unfunded liability of the Massachusetts SERS and Teachers’ plans has increased 6-fold and 12-fold, respectively. Roughly half of the increase can be attributed to two financial crises, but the other half reflects the fact that the state has simply not been contributing enough money. To prevent the unfunded liability from growing – never mind paying it down – the state must contribute enough to cover the normal cost and the interest on the unfunded liability. The state has failed to make this minimal contribution to either plan for the last 10 years. Moreover, the state shows no inclination to mend its ways. This behavior helps current taxpayers, but hurts future taxpayers who will have to pick up the bill as well as current and future employees who are unlikely to see the benefit improvements they need.
Massachusetts is unique among sponsors of public plans. It has been prudent, if not downright stingy, on the benefit side during a period when the major concern has been profligacy. Cheap benefits should be easy to fund, but the state has blown it, failing to make even the minimal contributions to stop the unfunded liability from exploding.