Healy Off Mark on Pensions

SEPTEMBER 2006 - A proposal by Lt.
Governor Kerry Healey that would replace our state’s
longstanding defined benefit (DB) public employee
retirement plan with a defined contribution (DC)
plan is not the example of sound public or fiscal
policy that Healey pretends to portray.

In case members missed it, Healey
has decided to make her proposal for “Pension Reform” a
primary issue in her campaign to be the next Massachusetts
governor. Throughout the summer, she campaigned across
the state spreading a false message of pending doom
regarding our current retirement system.

Under Healey’s plan, all newly
hired public employees would be enrolled in the
DC plan instead of the current DB plan. However,
all current public employees and retirees would
remain enrolled in the current DB plan.

By Healey’s logic, the Commonwealth
would be able to significantly reduce its annual
pension appropriation under this scheme. Furthermore,
it would be the new employees, not the government,
who would be on the hook for the assumed risk of
the investments.

Under the current DB system, retirees are guaranteed
a certain benefit, regardless of the investment performance
of the system. With a DC plan, the retirement benefit
depends entirely on the success of the investments.
If the investments do poorly, then the pension benefit
is reduced.

Healey is far off the mark with her
main premise – that
the conversion to a DC plan would save the Commonwealth
and the municipalities money. Studies and analysis
by the pension community prove the case to be just
the opposite. The conversion to a DC plan will in
fact cost the state money.

The current $13.3 billion unfunded liability is
a holdover from the days as a pay-as-you-go system,
when the state was not paying its share into the
pension fund. Moreover, the $13.3 billion liability
cannot be reduced by benefit cuts or plan alterations.

Nearly two-thirds of the $1.25 billion
the Commonwealth appropriated to the pension system
for FY07 goes towards paying off the unfunded pension
liability left over from the days when the state
was not properly funding its pension system. It
was not until 1984 that the state finally created
the Pension Reserves Investment Trust (PRIT) fund
to manage the state and teachers pension assets.
It was not until 1988 that monies began to be set
aside, according to a schedule, that would fully
fund the Commonwealth’s
share of its pension obligations.

Last year, active teachers and state employees contributed
over $873 million towards the cost of their future
retirement. At the same time, the Commonwealth contributed
$231 million for its share of the benefits. By all
accounts, current active employees are self-funding
the majority of their retirement benefit.

Group 1 employees hired after July 1, 1995, who
contribute 9% on the first $30,000 of their salary
and 11% on the remainder, are fully funding their
entire pensions without any contribution from the
taxpayers.

The new hires that Healey would place in a DC plan
are not costing the Commonwealth one red cent under
the current DB plan. That being the case, what is
the real emphasis behind this scheme? Signs point
to the larger national agenda being put forth by
financial service firms, which run the DC plans and
profit by investing the assets. These corporations
have been actively promoting this same agenda in
California, Alaska, Florida, and several other states.

By exploiting reports of alleged pension abuse and
scandal, Healey has created a straw man argument
to advance her own agenda at the expense of not only
public retirees and employees, but also the very
taxpayers from whom she seeks support.

Doing away with our defined benefit plan could also
open the door to mandatory Social Security coverage
for our public employees, which would cost the state
and municipal governments some $3 billion over ten
years. The sole reason Massachusetts has avoided
Social Security coverage is because our excellent
defined benefit plan predates Social Security.

Our Massachusetts public retirement systems are
well run, provide an excellent benefit and are on
the road towards paying off longstanding unfunded
liabilities. There is always room for improvement
and the Association has a long history of working
with Republicans and Democrats alike to find common
ground.
Healey’s rhetoric shamefully politicizes the
issue and demonizes hardworking public employees
for the sole purpose of personal political gain.
Having come from a working class background in Daytona
Beach, Florida and being the daughter of a retired
public school teacher, we expect better from Lt.
Governor Healey.

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