The state’s pension system — and the big gap between what is needed to pay retirees in the future and what the state has set aside to do so — will continue to be one of the largest issues lawmakers deal with this year. While there are lots of ideas about how to solve the unfunded liability problem — from essentially scrapping the public employee pension system and replacing it with something like a 401(k) to extending the time to pay off the unfunded liability — there are a few facts that lawmakers should not lose sight of.
First, they must be realistic about how the problem arose. Beginning many decades ago, the state did not set aside enough money each year to meet its pension obligations. Lawmakers also added new benefits without putting money into the system to pay for them.
Over time, this led to a huge unfunded liability. In 1991, for example, the assets in the Maine State Employee and Teacher Retirement Program represented only 36 percent of the plan’s expected liability, among the worst in the country.
The program was on track to be fully funded by 2028, as required by a 1995 amendment to the state constitution, when the bottom fell out of the national economy. Because the value of the money the state had invested dropped — as did investments around the world — the unfunded liability grew. In 2009, it was 68 percent funded, but the unfunded liability still totals about $4 billion.
Members of the Legislature’s Appropriations Committee got a rare bit of positive news about the state pension system last week. The Maine Public Employees Retirement System trustees agreed to make adjustments in calculations for inflation and use of the system. Because of the changes, the liability shrunk slightly from $4.3 billion to $4.1 billion, the system’s executive director, Sandy Matheson, told lawmakers. That means that the committee needs to find $85 million less than expected to make payments for the next two years.
Second, lawmakers must remember that while the state wasn’t putting in enough money into the system for decades, public employees had their required contributions — now at 7.65 percent — taken out of their checks and put into the system. So to blame state workers and teachers now and say they must contribute more of their pay to make the system’s books balance is wrong.
This is especially true when, as the governor has proposed as part of his budget, the state’s share would drop from 5.5 percent to 3.5 percent. Rather than collecting more money to pay down the unfunded liability, this proposal simply uses funds the state should be contributing to the pension fund to pay for other things, like tax cuts.
The third thing to remember is that changes to the pension plan, such as switching to Social Security or decreasing benefits, will do nothing to reduce the unfunded liability. They still should be part of an overall pension discussion, but they can’t be rationalized as helping pay down the unfunded liability.
Moving state employees and teachers to Social Security has several benefits. It would allow workers to move from the private sector to the public and vice versa. Currently, if a state trooper, for example, worked in the private sector for years and had Social Security taken out of his paycheck, he is not entitled to those benefits if he is part of the state retirement system. If he dies, his spouse doesn’t get survivor benefits.
On the other hand, Social Security would cost the state more, as the employer contribution is normally 6.2 percent. (It is 4.2 percent this year as part of the federal stimulus act.) Maine’s contribution to the retirement system is now 5.5 percent. If it is dropped to 3.5 percent, as Gov. LePage proposes, moving to Social Security actually will become more difficult because of the increased cost.
The most important thing for lawmakers to remember as they hear about the state’s “pension crisis” is that enough money is being set aside now to cover retiree payments, the so-called normal cost. The problem is sticking with a plan to eliminate the unfunded liability by 2028, a situation made worse by the stock market losses.
If the “solutions” they consider don’t help move the state toward paying off the unfunded liability, they aren’t the right ones.