PENSION REFORM UNFAIR TO NEW EMPLOYEES

PENSION REFORM UNFAIR TO NEW EMPLOYEES
PENSION REFORM UNFAIR TO NEW EMPLOYEES

Association Takes A Stand

JULY 2011 VOICE: With over a half century of knowledge and experience working with our public pension laws, Association President Ralph White is widely respected when it comes to our state's pension policies. Having led the Association since 1968, he has also had a hand in formulating the state's renowned defined benefit (DB) pension plan.

So it was no surprise that White took particular interest in a proposal, filed this past winter by Governor Deval Patrick (H35), dramatically changing the basic rights and benefits provided under Chapter 32, the Massachusetts public retirement law. While none of the proposed changes impact current retirees in any way and make very few changes to benefits for today's active employees, White and Association officials are deeply concerned about the affect the proposal would have on future employees.

Under H35, the retirement formula for Groups 1, 2 and 4 would change. In addition to increasing the retirement age for each group by two years, the proposal also alters the basic formula used to calculate one's retirement, resulting in far lower benefit levels than are currently provided. Also stricken from the law are termination benefits protecting career public servants with twenty or more years of service.

"I can understand that as time goes by and people are living longer, retirement ages may need to be adjusted. What was standard thirty years ago might not be a good fit today," said White, who is also an elected member of the State Retirement Board. "But when I analyzed the Governor's proposal, I quickly realized that this just goes too far. It is also unnecessary. Today's employees are largely paying for their own retirement benefit, especially in the case of Group 1.

"Where this bill does not impact retirees, some may question why I have such trouble with it. Plainly speaking, I just feel that the proposed changes are wrong. They will hurt people and do long term damage to the integrity of our pension plans. In good conscience, I can't sit by and stay quiet simply because the damage won't be truly felt for decades."

In recent years, studies by government agencies and private entities have shown that today's Group 1 employee (contributing 9% on first $30,000 then 11% on regular compensation over $30,000) is not only fully funding his/her own pension, but actually creating a surplus that will never be expended.

The Governor's proposal reduces contributions on income above $30,000 by 0.5% for Group 1 employees. But, in our option, this does little, if anything, to offset the loss of benefits to future retirees.

Formula Change

While supporting parts of the Governor's proposal, aimed at closing so-called loopholes in the current retirement law that could allow certain employees to "game" the system by spiking their pension benefit, it is the dramatic change in the basic retirement formula that most concerns Association officials.

"I don't think you'll find anyone who wants to allow people to game the system. These cases, while eye catching, rarely happen and should not cause a wholesale redesign of our retirement plans," comments Association Legislative Liaison Shawn Duhamel, who is also a member of the Town of Plymouth Retirement Board.  "Hopefully by Ralph voicing his concerns and providing examples of how the proposed new formula would harm people in the future, it has given the Legislature reason to pause before moving a bill through."

Under the current law, a Group 1 employee is allowed to retire at the age of 55 if they are vested with at least 10 years of creditable service. Employees with 20 or more years of service can retire at any age.

However, Group 1 employees, under the age of 65, receive a 0.10 reduction in the age formula for each year they retire before attaining 65. Instead of the maximum age factor of 2.5%, an employee retiring at age 55 would have an age factor of 1.5%, thus reducing their pension amount considerably.

Under H35, the maximum age formula would be reached at 67, with a minimum retirement age of 60. The formula would be reduced by 0.15% for each year prior to attaining 67 - instead of the 0.10% under the current law.

Today, a Group 1 employee retiring at age 60 with 30 years of service would receive a retirement factor of 60%. Under the proposed change, that same employee would receive just 43.5% at age 60 with 30 years creditable service, after contributing over 10% into the system and funding their own benefit.

"Many of the unions have also spoke out against this proposal, as well they should. When you see the dramatic effect of these formula changes, I'm not sure this is what the governor really had in mind when he proposed these changes," explained White. "It seems that the problems, that exist with pension systems in some other states, but not here, may have unfairly influenced what is being considered here in Massachusetts.

"Thankfully our systems are well run, financed and regulated under Chapter 32, which is a pretty tough law. Unlike some states where employees make no contribution, our employees are arguably paying too much and, therefore, in no way deserve to be penalized in this manner."

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