Want to fix the pension system? Start reading here

General Treasurer Gina M. Raimondo has eloquently discussed the problems of the underfunding of the Rhode Island pension system, identifying it not as a problem but as “the problem.” More

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Want to fix the pension system? Start reading here

Posted 6/6/11

General Treasurer Gina M. Raimondo has eloquently discussed the problems of the underfunding of the Rhode Island pension system, identifying it not as a problem but as “the problem.”

What Treasurer Raimondo and the other leaders speaking out on this issue have hesitated to do, however, is lay down the things that we need to do to fix it. Granted these are difficult decisions that are not going to be popular. But they will be necessary to address if we are going to bring the system into a sustainable range.

The discussion has to focus on where we should be in our benefits structure, not where we have been, using the following general principles and goals:

• The compensation and benefits offered to state employees should be competitive with those benefits offered in the private sector. The argument of the past that state employment offered lower compensation but better benefits is no longer valid.

• The offer of a state job does not commit the state to lifetime employment. Therefore, state benefits should have some portability similar to private-sector benefits.

• State employees should have a personal responsibility to provide for some of their retirement benefits, much like private-sector workers do. Those who make the decision to personally contribute to their retirements will retire more comfortably than those who do not.

• The state pension and benefit systems have to be fair to the taxpayers. They have to be affordable and sustainable.

• The taxpayers and the state employees should share the investment risks of changing markets. Under the present defined-benefit plan, the taxpayers are assuming all of the investment risk.

• All benefit calculations should be based on conservative, actuarially sound assumptions.

Now the Details

With these general principles in mind, what changes should we be making to our public-sector benefit plans? Past attempts at pension and benefit reform have picked at the edges, thus avoiding the political consequences of addressing the problem head on. Real pension and benefit reforms should solve the problem.

Here are some of the issues that we need to address:

• Change life-expectancy assumptions. People are living longer and will be drawing their pensions longer. Taking this into account will increase the unfunded liability.

• Change investment-return assumptions. For years the General Assembly allowed an unrealistic return assumption of 8.25 percent for the pension funds. Recently the State Retirement Board agreed to reduce the return assumption to 7.5 percent (still higher than the funds have been realizing). The assumption should probably be reduced to 6 percent, another adjustment that would increase the unfunded liability.

• Review prior buy-in arrangements. Over the years the General Assembly and the retirement board allowed people to buy increased pension benefits based on work outside the state system. We should explore whether these transactions were legal, and if they were illegal, then the pension benefits should be recalculated. All future buy-ins – if they are allowed at all – should be allowed only on a fully actuarially calculated basis.

• Cost-of-living adjustments. COLAs are a luxury usually not seen in the private sector. The current COLAs should be eliminated, and if offered, only as part of a reduced benefit option similar to private-sector annuity options.

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