Globe Editorial

New pension bill is laudable, but doesn’t go far enough

January 25, 2011

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THE MULTIFACETED pension-reform plan announced last week by Governor Patrick, Senate President Therese Murray, and House Speaker Robert DeLeo would achieve much of what’s possible, under current political and legal constraints, to contain potentially staggering public-employee retirement costs. That’s a tribute to the willingness of Beacon Hill’s so-called “big three’’ to tackle a complicated long-term financial problem in a serious way. But while the plan qualifies as far-reaching reform in the world of guaranteed public pensions, it looks like only mild tinkering in comparison with the changes in private-sector retirement in recent years.

The plan is laudable, as far as it goes. It would save $5 billion over the next 30 years, the Patrick administration estimates, by raising the minimum retirement age from 55 to 60 for most future state and local workers, eliminating early-retirement incentives, and calculating future workers’ pensions based on their earnings for a longer portion of their careers. The Legislature should by all means adopt these changes.

State and local pension systems in Massachusetts have come under fire in part because some public officials have qualified for six-figure pensions by exploiting loopholes. Past pension-reform bills have sought to curb abuses by, among other things, imposing a cap of $125,000 a year for future state employees. But the greater expense in public retirement systems lies not in a small number of blockbuster pensions, but in benefits for rank-and-file employees. While the average state pension is a modest $26,000 a year, those who spend their careers on the public payroll generally can retire earlier and with more generous benefits than comparable private-sector workers. If all goes well, the new pension-reform plan would guarantee that typical state employees would cover 94 percent of the cost of their own retirement — up from about 84 percent today.

Then again, state officials are still assuming that public pension funds will return an average of 8.25 percent a year — a goal they’ve met in the past. But if returns are lower in the future, taxpayers will have to cover the difference.

Meanwhile, the reform bill leaves other basic premises of the state pension system unexamined. First, the reform bill upholds traditional defined-benefit pensions, rather than moving toward a 401(k)-style system. Second, existing workers, even the newest hires, would be exempt from the new rules. This is in keeping with a 1973 state Supreme Judicial Court opinion, which advised against changes to the terms of public workers’ pensions after they begin contributing to the system. Yet lawmakers haven’t adequately explored the contours of that prohibition, and there is ample precedent in the private sector for altering retirement provisions. (Often, workers keep traditional pension benefits they’ve accrued so far, but employers promise only a 401(k) match for future service.)

Defenders of the pension system argue that government workers are only receiving benefits that all employees deserve, and that the state shouldn’t take part in a race to the bottom. Undeniably, the 401(k) approach forces workers to make their own investment choices — and assume the risk of coming up short.

Yet the upside is significant, too: Workers these days are less likely to stay with the same employer for their entire careers. The public and private sectors alike benefit when workers can move more freely between them, without letting their retirement benefits dictate their career trajectory. Besides, workers with traditional pensions are at risk, too, when their employers make big promises but fail to budget for them.

Though Massachusetts has been more responsible than many other states, it still owes billions of dollars for benefits for people who left public service some years ago. As more and more private workers become responsible for their own retirement, the need for a corresponding change in the public sector becomes more evident. The pension bill offered by Patrick, Murray, and DeLeo will certainly shore up the existing pension system for now, but it doesn’t resolve the underlying issue.

Correction: An earlier version of this editorial misstated the expected return of state pension funds. The target is 8.25 percent per year.