Dean Baker: Raimondo-Chafee pension ideas look ‘fairly harsh’

Dean Baker is an economist – and an iconoclast.

Baker is co-director of the Center for Economic and Policy Research in Washington and famously warned about the housing bubble as early as 2002. Last winter, he released a study arguing that most states’ pension shortfalls “appear easily manageable.”

Over the weekend, Baker emailed me his thoughts on the pension changes Treasurer Raimondo outlined last week on WPRI 12’s “Newsmakers”:

This seems to me to be fairly harsh, especially to retirees.

Asking people to do without cost-of-living adjustments (COLAs) is actually a big cut. This really is a contractual obligation. I don’t know the specific wording in the workers’ contracts, but obviously everyone understood the COLA as part of their pay package. To say that retirees “won’t get a raise” is just a cynical effort at confusing the issue. This is a cut, since it means that the pension benefit will not go as far next year as it does this year, and there will be even further cuts for as long as the freeze is in effect.

I understand that the state is experiencing serious financial strains, but I wonder if it is making similar cuts in payments to private contractors. It seems that your treasurer is taking it out of the hides of workers essentially because she thinks she can. It is also important to recognize that by focusing on full funding she has set an artificially high bar. Usually an 80% funding ratio is considered acceptable. To get to 80% would only require half as much additional revenue or cuts as her $7.3 billion target.

One final point, and this may still be up in the air: if cuts are made to pensions it would be much fairer to focus on higher-end earners and also to make near retirees share in the burden, not just current retirees. Specifically, if a COLA freeze is in place for four years, that amounts to roughly a 10% cut in benefits for those already retired. Those hardest-hit will be those who have just retired, who may get this lower benefit through a long retirement.

On the other hand, if someone retires in four years, after the COLA freeze is over, then this person will get full benefits, as though there never had been a COLA freeze. It would make more sense to distribute these cuts over current and near retirees so that the full burden is not felt by current retirees.

It would also be a simple matter to structure the cuts to be progressive. For example, the full COLA can be given on amounts up to $10,000, a half COLA $10,000 to $20,000, and no COLA on pensions above this amount.

The state really owes its workers a lot for being willing to accept less than the pension that they are owed. (Maybe it was too generous, but states pay too much all the time for goods and services; they don’t generally have the opportunity to come back years later and retake their payments.) It should have an obligation to ensure that people suffer as little as possible as the result of the incompetence of the state’s elected officials.

In a follow-up email, Baker added that he was “sorry to see that the state seems to be moving away from defined-benefit pensions.” (Raimondo has suggested capping the guaranteed pension and augmenting it with a 401k-style account.) “This is a way to give a benefit that is of great value to workers (a guaranteed pension) at little cost to the state,” he said. “I can’t see why it would want to throw this away.”

Related: Josh Barro calls Raimondo-Chafee pension ideas ‘very promising’ (Sept. 16)

(photo: Center for Economic and Policy Research)

5 thoughts on “Dean Baker: Raimondo-Chafee pension ideas look ‘fairly harsh’

  1. Don’t forget, COLA’s are already frozen for the firs 5 years after a person retires and under the Plan B COLA the amount is capped at $35,000. So in essence, the reforms he is talking about have already been enacted for the current work force.

    Again, I keep on hearing in the rhetoric that “everything is on the table” but I am not hearing reporters ask, or keep pressing on, why tax increases, especially on those who benefited from the Flat tax or corporate tax breaks ( which were paid for by changes to the pension fund ) are part of the equation.

    • Where are you seeing a 5-year delay for a COLA to kick in? The docs I have say the COLA starts on the third anniversary of retirement, not the fifth (or at age 65 for those who retire after June 2010).

      I can’t speak for the rest of the press corps, but Tim White put the tax increase question to Raimondo on “Newsmakers” just last Friday. It’s in the second half of the show. (You won’t agree with her answer, though.)

  2. The Plan B coal kicks in after 5 years, not 3. And I did see Tim put the question to her. It needs to be asked and asked again. once isn’t enough. Ask about the flat tax, corporate taxes. and how the same groups that got all the breaks in the last decades are the same groups now advocating for pension reform. This is redistribution of wealth from workers to the bosses.

  3. Thank you, Mr. Baker, for your sensible, simplistic analysis. It is encouraging to those retirees waiting for the Raimondo=Chafee boot to fall.

    The Department of Justice can spend $10 for a muffin but RI appears to be willing to break its Contracts with its own retirees, while letting all the other contracts stand untouched. It expedites a Court case but then does not want to live within the parameters of the Judge’s decision.

    It is shameful at the very least!!!

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