A Modern Touch for the Pension System
It’s time to take a hard look at how to modernize and streamline Massachusetts’s archaic pension system.
There are 106 state and local public employee pension systems. Each has overhead, inefficiencies, loopholes, and, in some cases, mounting deferred expense.
The state pension system has $13 billion in unfunded liability that acts like an anchor on the budget and mortgages the state’s future. Next year, taxpayers are set to pay more than $1 billion just to chip away at the pension debt. Those annual payments will rise to $2.3 billion by 2023.
In addition, cities, towns, and counties waste almost $200 million a year running their own systems, much of that going toward making up for poor returns on investment. A study by the Pioneer Institute found that just 5.7% of local pension systems match the state fund’s investment returns.
Local pension systems are also weighed down with separate investment managers, accountants, and additional duplicative overhead. Maintaining that local control over pension systems comes at a large cost. Taxpayers will pay another $3 billion over 20 years just to make up for poor investment performance in local systems over the last decade.
The pension system is also easily gamed by insiders who know how to work the system to maximize their payout. At the same time, the system discourages bright, idealistic young people from spending a few years in public service before moving on in their education or career, by denying short-term employees any pension benefit.
What can be done to fix this mess? Most companies have started offering their employees a 401(k) option. Recognizing that modernization, other states have followed the lead of the private sector, and Massachusetts should be next.
If we institute changes that bring us more in line with the successes of the private sector, we can stop the $13 billion in unfunded pension liability from growing larger, and immediately deliver nearly $200 million in annual savings while maximizing returns for retirees.
The Healey-Hillman pension reform plan would apply to all new public employees in Massachusetts, except police officers and firefighters, who often retire at an early age and spend their days in hazardous working conditions. It would fold 106 taxpayer-funded state, county, municipal, and authority systems into one, eliminating abuses, duplication, and unnecessary local overhead costs, and give municipalities the benefit of the state pension fund’s strong performance.
Employees could choose to invest the money themselves, continue to have the Commonwealth invest it for them, or opt for guaranteed annual interest equal to the 10-year Treasury bond, currently around 5 percent.
Employees could take their retirement benefits with them when they leave, creating an incentive for young people to spend a few years in public service.
Our proposal will save some money immediately and have significant long-term financial benefits. The system would save more than $100 million over the next decade. Once all state employees are covered by the plan, taxpayers will save $140 million each year.
Municipalities would save about $200 million a year immediately, and could use the savings to return money to taxpayers in the form of property tax relief, or to boost local services. Most important, once all employees are in the new system, taxpayers in Massachusetts will not have to worry about unfunded pension liability dragging down the budget and the economy again.
Our pension reform will transform a broken system into one that is fair to employees, less burdensome to taxpayers, and helps to modernize an out-of-date Massachusetts bureaucracy that is weighing the state down and making it less competitive.
Lieutenant Governor Kerry Healey is the Republican candidate for governor.