Senate approves shakeup of Mass. pension system
BOSTON — The Massachusetts Senate last Thursday approved an overhaul of the state’s pension system that pushes back the retirement age for future public employees and changes the formula for how pension benefits are determined.
The bill aims to save the state $5 billion over the next 30 years and reduce the state’s $17 billion unfunded pension liability. It passed by a 24-10 vote.
“We need to do this to maintain the health of the commonwealth’s pension system and the integrity of the benefit that our employees depend upon,” said Sen. Katherine Clark, D-Melrose, who introduced the bill.
The bill estimates savings of $3 billion for the state and $2 billion for municipalities over the next 30 years by raising the minimum retirement age for most state and municipal employees from 55 to 60 while increasing the minimum age for receiving the maximum pension benefit from 65 to 67.
The changes begin with workers hired after Jan 1, 2012. It also reduces some incentives for early retirement. An amendment adopted by the Senate would boost the retirement age by one year every six years for employees hired in that six-year period.
The bill must now be approved by the House before moving to Gov. Deval Patrick’s desk. Patrick, who has called pension reform one of his top legislative priories, filed a similar proposal in January.
Pension benefits under the proposal would be based on the average of an employee’s five highest wage-earning years, replacing the current three-year formula.
Critics of the current formula say it has prompted abuse by workers who accrue many years of service at low pay, then seek a high-paying job for just three years, allowing them to receive a benefit much larger than the overall contribution they made to the system.
Proponents of the changes say this will help the state cover its unfunded liabilities, which are scheduled to be funded by 2040. Earlier this year, the Legislature and the governor agreed to extend the schedule for fully funding the pension system from 2025 to 2040 to save the state $800 million in the current fiscal year, but with a potential cost to the state of $30 billion between now and 2040.
Fully funding the pension system would also help the state maintain its bond rating. A high bond rating allows the state to borrow at a low interest rate.
“A strong rating turns into savings for the commonwealth of millions in a year that we can invest in our roads and bridges, our schools and our other programs that we care about,” Clark said.
Massachusetts currently has a rating of AA-plus from Moody’s and Fitch, one notch below AAA. Standard and Poor’s has given the state a rating two notches below AAA but with a positive outlook.
Critics of the bill said the state could find savings through other methods. Public employees should not lose benefits because the state did not set aside enough money during good times, they say.
“We haven’t been paying our share of the debt we owe on our unfunded liability,” said Sen. Kenneth Donnelly, D-Arlington, who filed several failed amendments that would have protected employee benefits.
“The rating agencies in New York don’t care where we get the money,” Donnelly said. “They did not tell us we had to take it from our future employees.”
The bill does increase the base amount for calculating cost-of-living increases from $12,000 to $13,000, for current and future workers. It has not been raised since 1998. The state contributes 2.7 percent to the public pension fund, and public workers have one of the highest contribution rates in the country.
Lawmakers in the Senate said they were not happy about the overhaul, but felt it was necessary in the ever weakening economy.
“These are unpleasant exercises. It’s not always easy to do these things, but the world is changing,” said Sen. Stephen Brewer, D-Barre, the Senate chairman of the Joint Committee on Ways and Means.
Ray McGrath, a lobbyist for the International Brotherhood of Police and the National Association of Government Employees, said the overhaul was not necessary because the pension system has been changed many times over the past decade. Lawmakers are not considering the positive results of those changes.
“It’s an attempt to provide some political cover for people to say they are doing something different,” he said. Changing the benefit plans for future employees could hurt the state in the long run, McGrath said.
“We now have just created a two-tier system. Those who work today and those who work for the future in public service both on the state and local level,” he said.