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Take-It-or-Leave-It Approach to Pensions Threatens Retirees in Rhode Island

A pension debate in Rhode Island this fall could set the stage for how dozens of other states take up the issue when regular sessions resume in 2012. As Progressive States Network reported last month, calls for dramatic changes to public pension systems and social security are largely an opportunistic move by conservatives to advance a privatization and anti-tax agenda. The debate playing out in Rhode Island has turned into another unfortunate instance of this, driven by a take-it-or-leave-it proposal by State Treasurer Gina Raimando – a venture capitalist by trade – that would slash benefits and partially privatize the system. To support the proposal, a newly formed lobbying organization supported by financiers and business lobbyists is running a full-press political campaign that is choking out discussion of more reasonable alternatives.

In important ways, Rhode Island’s situation is unrepresentative of other states, most of which faced short-term deficits due to the recession but are now well on the way to recovery. The Ocean State’s pension fund deficit ranks among the highest – around 50%. While the successive stock market crashes in 2000 and 2008 have amplified the problem, the root of the problem is that the state failed to pay into the pension fund from 1936 into the 1970s. Importantly, the cost of pension benefits for current and future state employees is actually among the lowest in the country: less than 3% of payroll, according to the National Public Pension Coalition. The program is not unsustainable, as Raimondo and her supporters argue. Rather, the high cost to the state now is the result of promises that were broken a half-century ago.

Everyone from Raimondo and Governor Lincoln Chafee to the teachers, nurses, and firefighters whose retirement security hangs in the balance agrees that the problem needs to be addressed. The dispute is over the details and the process. Raimondo and Chafee introduced their proposal in late October, and are demanding that legislators approve it with no major changes by Thanksgiving. The tactic echoes those of conservative leaders in Wisconsin, Ohio, Indiana, Idaho and elsewhere this year, who demanded that radical changes to collective bargaining, pensions, and other long-established policies and programs be rammed through the legislative process – ultimately in order to avoid public scrutiny.

Though there has not been enough time to review Raimondo’s plan thoroughly, the key aspects of it entail large, permanent cuts in benefits:

  • Eliminating pension benefits for part-time employees entirely.
  • Reducing benefits by at least 43% under the current defined benefit (DB) pension plan, and adding a 401(k)-style defined contribution (DC) retirement plan.
  • Raising the retirement age from 62 to 67.
  • Requiring employees to contribute 8.75% of their pay: 3.75% to the DB pension and 5% to the DC plan.

The DB benefit cuts “make up” for about 40% of the estimated pension shortfall, but relying on this level of austerity to balance the budget would have far-reaching implications. Pensions are the only source of retirement security for about 30% of state employees, since they are ineligible for Social Security benefits. Also, over half of state employees are women -- and usually even more than that among part-time workers whose pensions are being eliminated entirely. Placing such a disproportionate burden for fixing the problem on the state’s police officers, nurses, and snowplow drivers – and especially on women – could have unwanted consequences, both on the quality of state and local services and the economic impact of reducing retirees’ spending.

The benefit reductions would be achieved by ceasing cost-of-living adjustments (COLA) for up to 19 years, until the pension is 80% funded. Thereafter, COLAs would only be permitted in years when the fund grows more than 5.5%, and they would be capped at a maximum of 4% each year. Cancelling these annual adjustments means that the real value of retirees’ income gradually decreases as inflation erodes the value of money over time. For instance, had the minimum wage kept up with inflation since 1968 when it was $1.60/hour, it would be worth $10.39 today; because we failed to do that, the wage is only $7.25 now and low-wage workers are making over 30% less than they were over forty years ago. If inflation averages 3% per year, Rhode Island’s pension benefits will decrease by about 43% as a result of freezing the COLA. Inflation over the last nineteen years has risen 58%, so that the value of a dollar in 1992 is now worth only $.62.

Adding the 401(k)-style DC plan would likely not make up the difference: DC fund managers operate with little transparency, and accountholders are ill-equipped to oversee their investments themselves. And as so many families experienced after the 2008 stock market crash, the plans expose retirees’ economic security to too much risk. What’s more, the management fees for DC plans are much higher than for traditional pensions, so even if Rhode Island retirees manage their funds effectively, their savings will be reduced by thousands of dollars. In fact, two states that converted to this type of pension system (Nebraska and West Virginia) have since converted back to a DB system.

Several alternatives to these austere measures have been suggested, by both labor representatives and pension advisers. Increased employee contributions would take much of the burden off of taxpayers, essentially by converting more of the payroll into deferred compensation. In addition, extending the period in which to make up the shortfall would not only reduce the annual amount the state needs to contribute, it would also provide more time for those investments to grow. Under current rules, the shortfall must be made up within 19 years, which has dramatically increased the year-to-year payments the state must make. Raimondo is proposing to raise that to 25 years, though it would be just as reasonable to raise it to 30 since the state is tackling a problem that has been 75 years in the making. Also, according to William Fornia of Pension Trustee Advisors and Jordan Marks of the National Public Pension Coalition, Raimondo’s anticipated growth rate for the pension funds is unnecessarily low, and using something closer to the historical average over the last 30 years both makes sense and would help reduce the impact on retirees.

While Treasurer Raimondo and Governor Chafee are not going as far as states like Ohio and New Jersey, where state employees’ right to collective bargaining over pension benefits were stripped this year, neither have they been willing to entertain counterproposals. Several legislators, including Representatives Rene Menard, Scott Guthrie, and Spencer Dickinson, have called for more time to review the proposals and an independent, legislature-commissioned analysis, but thus far those requests have been turned down. House Speaker Gordon Fox and Senate President Teresa Paiva Weed have argued that Raimondo’s analysis is enough to go on. After marathon legislative hearings in the past week brought out hundreds of state residents, the debate appears to be heating up.

Full Resources from this Article

Take-It-or-Leave-It Approach to Pensions Threatens Retirees in Rhode Island

Demos – The Failure of the 401(k)
Demos – Republicans’ Next Move: Get Rid of Pensions Altogether
Economic Opportunity Institute – Pension Privatization in Britain: A Boon to the Finance Industry, a Boondoggle to Workers
Economic Policy Institute – Discounting Public Pensions: Reports of Trillions in Shortfalls Ignore Expected Returns on Assets

This article is part of PSN's email newsletter, The Stateside Dispatch.
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