Study: ‘Radical changes’ needed to fix expensive RI pensions

A new report from a top liberal think-tank in Washington offers a tough indictment of Rhode Island’s public-sector pension system, warning “radical changes” will be required to shore it up.

In Rhode Island, 5.7% of state and local government spending goes toward pension contributions, according to U.S. Census Bureau data analyzed by the Center on Budget Policy Priorities. That’s the second-highest share in the country, topped only by Nevada’s 7.6%, and far above the national average of 3.8%, the study found.

The center’s extensive new study – “A Common-Sense Strategy for Fixing State Pension Problems in Tough Economic Times” – focuses on defending defined-benefit retirement payments for government workers against conservative economists and other critics. It argues the problem is not as acute as often depicted.

“Most states have generally been responsible in funding pensions,” write Elizabeth McNichol and Iris Lav, the study’s authors. But a close reading shows they do not believe Rhode Island is among those.

“Any reform strategy must reflect an individual state’s circumstances, with radical changes reserved for states whose pension plans are the most severely underfunded,” McNichol and Lav write. They go on to provide a list of six states that “have grossly underfunded their pensions in past years and/or granted retroactive benefits without funding them” – and Rhode Island is one of them.

In the case of Rhode Island and other states with severe pension shortfalls, “drastic measures will likely be needed, such as significantly increased contributions in the near future or significant reductions in pension benefits,” they write.

The center’s study will add fuel to the growing alarm in Rhode Island over the pension funding issue, particularly coming as it does from a highly respected organization that traditionally supports government programs and liberal priorities.

Its publication follows the state Retirement Board’s decision to accept a sharply higher estimate of the state’s long-term pension liability that puts the system’s funding level at only 48%, among the lowest in the country. The state and municipalities will be asked to put much more into the pension fund starting July 1, 2012.

General Treasurer Gina Raimondo, who has pushed for the new pension estimates, is set to release a major report of her own on Monday that will outline the scale of the problem and offer potential solutions. The General Assembly’s leaders are considering calling a special legislative session to address the pension issue.

For most states, the center’s experts propose “increases in plan contributions, increases in employee contributions, and sensible changes to pension eligibility rules and benefit levels” will be sufficient to replenish their pension funds “over time.”

The problem can be solved by raising the average government’s share of spending on pension contributions from the current level of 3.8% to around 5%, the study says, which would still be less than the 5.7% spent in Rhode Island.

“In this way, states can avoid undermining either the retirement security of their employees or their ability to fund education, health care, infrastructure and other public services necessary to maintain strong economies in both the short and long term,” McNichol and Lav write.

They also warn that switching from a defined-benefit to a 401(k)-style defined-contribution system will not solve the problem because closing the pension system to new employees will cut off contributions to the fund while exposing government workers to more risk and higher investment costs.

“State and local governments considering defined-contribution or hybrid plans solely for the purpose of saving money would be well advised to look carefully at the experience of other states,” they write. Nevada, for example, decided not to switch to a 401(k)-style plan after an analysis showed it would raise the state’s retirement costs, according to the study.

8 thoughts on “Study: ‘Radical changes’ needed to fix expensive RI pensions

  1. The argument that 401(k)-style plans “expose government workers to more risk” is childish, short-sighted, and it underlies the fundamental problem. Nearly all private sector employees have 401(k) plans despite the *gasp!* risk involved. Why is it that government jobs should be insulated from economic risk wheras private sector jobs are not? We need to re-condition our government workers to understand that there is no such thing as entitlement. They must earn what they receive, just like the rest of us.

  2. Several problems exist with the “401K like” solution (403B plans). The state suddenly loses the cash flow of employee contributions currently in place, and the likely “employer match” of a 401K has to be paid immediately (no funny math with a defined contribution plan). The only way the 401K solution works is when the state makes no matching contributions.

    We dug ourselves into a hole because the average Rhode Islander is brain dead when it comes to the political world around them. We keep re-electing the very people who created this mess.

  3. I agree with GaryM. The true State contribution rate to current state employees is only .59% The much higher ’employer contribution’ rate heralded in the media reflects the unfunded liability attributed to retirees. Theses are not current employees and to use the term ’employer payroll contribution’ is not accurate.
    These figures changed a bit with the recent reduction in the assumed rate of return, but will be similar when the employee match is increased to 11.75% of pay.

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