Digging out pension plans
Can Governor Deval Patrick’s new retirement plan for public employees really plug a $20 billion hole in the state’s pension plans?
That’s hard to say for sure because the governor wants to push the moment of truth so far into the future. But Patrick or some other governor will almost certainly have to do more in the future to balance the state’s retirement books.
Among other things, the Patrick proposal unveiled this week would require future state and municipal employees to work five years longer and contribute more to their pensions before qualifying. Early retirement would mean smaller benefits. New employees would pay more than 90 percent of the cost of their retirement. These are measures that would make a difference over the long haul.
Patrick also wants to extend the timeline for the state to fully fund its pension obligations. State officials have been working toward this goal since the late 1980s and face a self-imposed deadline of 2025. Now Patrick wants to extend that deadline to 2040. That would allow him to avoid making a $1 billion contribution due this year. He’s also kicking the can a long way down the road.
No one can say how much will be enough to fully fund pensions in the year 2040. But we do know where the state’s pension finances stand now, what has happened over the past two decades and how most experts view the immediate future. The executive summary: The financial hole is pretty deep and assumptions about future pension investment returns are too rosy.
The pension funds that cover state workers and teachers working for cities and towns throughout Massachusetts have enough money to cover 68 percent of what these employees have earned so far. The other 32 percent is what accounts for that $20 billion hole, based on when the numbers were last calculated, in January 2010. And those figures don’t include scores of other municipal pension plans.
Pension funds aren’t required to have enough money to cover all their obligations at all times. Some states are even worse off. Massachusetts pension funds were in dismal financial shape when officials first addressed the funding problem decades ago. In 1990, the funds had enough to cover only 39 percent of earned benefits. State pension officials say they are still on track to fix the shortfall.
But look at the same problem from another angle. Those pension funds were short by $12.2 billion in 1990. After two decades of effort to fix the problem the number has grown $20 billion. The reason: Both pension assets and obligations have grown much bigger over the last 20 years.
The stock market debacle of 2008 hurt all pension funds. But the state’s unfunded obligation averaged $13.3 billion over the three years before the market plunge. That’s still higher than the shortfall of $12.2 billion in 1990. That’s not progress.
The state’s long-term strategy really rests on pension fund investment gains. It assumes the state’s $46.8 billion in pooled retirement assets will earn 8.5 percent on average each year. That’s almost certainly too high and even annual returns of 1 percentage point less between now and 2040 would have huge consequences (theoretically, compound $46.8 billion at 7.25 percent instead of 8.25 percent over 29 years and you end up with $100 billion less).
The governor is making real progress on the state’s pension problems but there will be more work to do.
Steven Syre is a Globe columnist. He can be reached at email@example.com.