Senator Ken Donnelly

‘A good deal for Massachusetts Taxpayers’

|  By State Senator Ken Donnelly

 A number of articles and editorials have appeared recently bemoaning the state of the Massachusetts public pension system and offering ideas about how to get out of the pension “mess.” Many even ques-tion, explicitly and implicitly, whether our citizens deserve retirement security (an argument I thought was settled in the 1930s). Critics of the public pension system routinely assert that the system is too costly, overly generous, and creates an undue burden on taxpayers. These allegations, however attractive in today’s economic environment, are not based on facts. Both the Massachusetts pension sys-tem and Social Security are contributory sys-tems that require contributions from both employees and employers. Massachusetts public employers and employees do not par-ticipate in the Social Security System. If they did, both the government and the public employee each would be required to contribute 6.2% of the employee’s salary. In fact, public employers in Massachusetts contribute, on average, only 2.7% of salary to cover the cost of benefits earned each year, while the pub-lic employee, on average, contributes 9.2%. In other words, the government pays substantially less and the employee pays substantially more than they would under Social Security. Employees hired after 1995 con-tribute nearly 11% of their salaries towards their pensions, which in most cases fully covers the cost including administration. The Massachusetts public pension sys-tem is a good deal for taxpayers. So what’s the real problem facing the public pension system? The current financial strain on the pension system is due to years of underfunding by the state and its municipalities. Until 1988, the state and municipali-ties paid only those pensions due in a given year. That is, while employees made their required contributions to the retirement system, the state and municipalities did not. This “pay-as-you-go” system worked as long as the workforce was young and the num-ber of employees retiring was low. By the mid-1980s, however, the amount needed to fund the system when then-current employees retired was $12 to $14 billion;

money that wasn’t there. In 1988, legislation was passed to address this “unfunded liability.” The legislation set a deadline of 2028 for fully funding the system, increased employee contributions again, and required mandatory minimum payments from public employers. Like any retirement account, the money that employees and employers pay into the pension system is invested. The 1988 law set an assumption that the investment would yield an average of 8.25% interest over 40 years, with the understanding that some years returns would be higher, and some years lower. This might seem overly optimistic, especially after a year like 2008. But the facts show that over the past 28 years, the return on pension investments is averaging 9.25%, and that includes the huge losses sustained in ’08. The State Pen-sion Fund reported an investment return for 2010 of 13.6%. Contributing to the burden on our pen-sion system has been the lack of planning for years when the system experienced returns below the assumption. Higher-than-average returns should be invested back into the system to mitigate the effects of years with lower returns (like saving for a rainy day). But over the past 20 years, when the return was greater than 8.25%, the state and many municipalities diverted the “extra” money toward other priorities. The extra return was not put back into the pension system as a cushion for years like 2008. Diverting excess revenue during good years has resulted in the state, and many municipalities, being behind schedule for funding their pension systems by the deadline set by law. Dismantling or eliminating the current pension system will not address these prob-lems; the unfunded liability will still have to be paid off. It is up to the Commonwealth and its cities and towns to fulfill the obliga-tion that has been put off for so many years. This and additional steps the Legislature is taking on pension reform will protect our employees, our taxpayers, and the pension system. Employees’ pension benefits will continue to be paid for largely by the em-ployees at almost no cost to Massachusetts governments. Senator Donnelly represents the Fourth Middlesex District in the Massachusetts State Senate. He currently serves as Senate Chairman of the Joint Committee on State Administration and Regulatory Oversight. If you would like to contact Senator Donnelly or his staff, they can be reached at their State House office by calling 617-722-1432.