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Editorial: Shining a Spotlight on Pension Reform

Originally published in the Worcester Business Journal

May 23, 2011
Worcester Business Journal Staff

Anyone who takes a moment to look rationally at the status of public pensions in America and in Massachusetts will be given pause.

Significant long-term promises have been made to workers, and yet those promises have not always been matched with funding, particularly during the Great Recession.

Faced with ever-widening deficits, legislators have often chosen to let pension funding slide in favor of saving jobs.

Across the United States there exists an astounding $660- billion gap between what state pensions have on their books for long-term liabilities and the money states have socked away to cover those promises, according to a recent report from the Pew Center of the States.

At the same time, there also exists a $604-billion funding gap for public retiree health care and other benefits across the United States.
Falling Short

In Massachusetts, the picture is equally grim, according to the Pew report. The Bay State’s total pension liability as of fiscal year 2009 was $61.1 million, but we have funded only 68 percent of that liability.

An 80-percent funding level is considered healthy, according to Pew. Only 18 states met that threshold for FY09, with New York leading the way (its system is funded at a level of 101 percent, meaning it has a surplus).

The precarious state of public pensions came to light in Worcester recently when the Worcester Regional Research Bureau hosted a panel discussion on the topic.

The consensus of the panel, which included David Luberoff, executive director of the Rappaport Institute for Greater Boston at Harvard University, was that our pension system in Massachusetts is broken, but fixable.

The critical question is, what do we need to do to get the system fixed, and how soon do we need to act?

It’s been clear for some time that we are under-funding our pension obligations at the state level, and the same is likely true for municipal systems throughout the state. And yet the issue rarely gets any serious attention from the media, nor from elected officials.

Ignoring the problem won’t make it go away.

The fix is actually pretty simple: Public pensions need to be funded at the recommended 80-percent level.

States and municipalities need to set appropriate resources aside to make sure that they can meet their obligations. It’s not rocket science. It’s a simple concept, one which we all should have learned through the cutbacks of the last few years.

Saving money has not been a discipline we Americans have exhibited over the last decade.

Money was cheap, housing prices looked like they would soar forever, and the economy was booming. Our economy has come back down to earth, and that’s not a bad thing. We need to demand from our legislators that they make the hard decisions that are required when it comes to fiscal policy.

Those hard decisions include adjusting some retirement ages up, and a combination of trimming benefits and increasing employee contributions.

State payrolls will simply not be allowed to grow in the near term to match the pay-as-you-go approach on the health care side of the ledger. In addition, a built-in growth assumption of 8 percent annually is imbedded in most pension return forecasts.

While the 25-year period from 1984 through 2009 produced average returns of 9.4 percent, do we all believe in the assumption that return levels will continue at or over the 8 percent mark over the next 25 years? It seems imprudent to assume it will.

It’s time to take the medicine of the economic recession and act wisely today in order to preserve tomorrow.

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