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Voices: Perspective

MTA head responds to pension column

Says defined benefit system would cost taxpayers more

BY: Paul Toner


Stephen Eide’s argument for switching public employees in Massachusetts from a defined  benefit pension system to a defined contribution system (“Time for Real Pension Reform,” July 5, 2011) ignores one major impediment: Doing so would cost the taxpayers of Massachusetts hundreds of millions of dollars a year without improving the benefits provided to retirees.

In his 1,000-plus word article on the Massachusetts pension system, Eide fails to describe the most basic facts about our system:

  • Massachusetts public employees, unlike all private-sector employees and most public employees in other states, do not participate in the Social Security retirement system.
  • Massachusetts public employees pay more for their pension benefits than most public- and private-sector employees in the country.

If Massachusetts eliminated the defined benefit pension system, employees would have to be enrolled in Social Security and then, under Eide’s proposal, would receive a 401(k)-style benefit on top of that. Let’s look at how costly it would be to make that change just for the 80,000-plus teachers and school administrators who participate in the Massachusetts Teachers’ Retirement System.

Teachers pay, on average, about 10 percent of their salaries toward their own pension benefits, and the Commonwealth pays about 2 percent. At that rate, they fund more than 90 percent of the costs of their own pensions, on average. If the MTRS were eliminated, teachers and the Commonwealth would both pay 6.2 percent of payroll into Social Security. According to the MTRS, that change would cost the Commonwealth $220 million a year.

Next, the Commonwealth would have to contribute, say, 3 percent of payroll toward a 401(k)-style plan, a typical contribution rate for large employers. That would cost the taxpayers another $165 million a year.

The grand total for replacing the MTRS with a pension system comparable to what private-sector employees receive would be $385 million, or more than a third of a billion dollars a year. That doesn’t even count the costs of making similar changes for all other municipal and state employees. The annual costs could easily exceed $1 billion.

Eide did get one thing right. Changing the system in this way would do nothing to get rid of the unfunded pension liability that the Commonwealth was responsible for creating in decades past.

Eide’s proposal would be so expensive that no credible politician on either side of the aisle has seriously recommended going this route. If any do make such a proposal in the future, they had better be prepared to explain how they plan to pay for it.

Paul Toner is the president of the Massachusetts Teachers Association

 

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Steve Eide
Says on 07.21.2011
at 2:09 PM
Mr. Toner,
Your response is fair, but not, I don't think, devastating to my argument. In response, I have two quick points to make.

First, employer cost estimates about pension systems are contingent on a range of actuarial assumptions that are by no means fixed or uncontroversial. I assume that your estimates about the cost of the Massachusetts system rely on the standard 8% or so discount rate. But a more realistic cost of any system should rely on a more conservative rate, in order to account for the fact the pension fund will not earn 8% or so every year, and when it does not, the employer/state/taxpayer will have to compensate. When the cost of the system is calculated with a more conservative discount rate, the comparison between the cost of the current system and how much a defined contribution/Social Security system would cost looks much different, and much less like the “deal” the current system’s advocates say that it is.

In other words, what a city or state is putting into a pension system each year is not necessarily the same thing as what the true cost is. This year, Massachusetts pushed back its amortization date, which enabled it to lower its budgetary appropriation, but that didn’t make it a cheaper system. The costs of the system are much more uncertain than you claim.

Second, on the issue of Social Security, there are good reasons to believe that Massachusetts public employees should be in Social Security regardless of the whole defined benefit vs. defined contribution issue. 30% of state and local government employees nationwide are not in Social Security. Enrolling them would tap a much-needed revenue stream for the strained system, and also, bear in mind that Social Security is a social welfare program as well as an enforced savings/insurance program. We all as a nation contribute to Social Security both to ensure that we’re putting something away for later, but also so that poor people who can’t afford to save are at least somewhat supported in their retirement. Massachusetts public employees are free riding, because they’re not bearing any of the social welfare burden. Social Security reform is a national challenge, which means that everyone needs to be involved.
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