Governor Patrick’s pension proposals
On January 18, Governor Patrick filed legislation which proposes changes to the public employee pension system. If passed, the bill’s provisions would apply to all new public employees hired after the bill is enacted. There are also three provisions of the bill that apply to current MTA members.
The governor’s proposal would extend from 2025 to 2040 the date by which the pension system will be fully funded. If the schedule is not extended, the state will have to put an additional $1 billion into the pension fund for FY12, largely to make up for the shortfall resulting from the downturn in the stock market. This would add another $1 billion to the estimated $2 billion deficit – resulting in cuts to vital programs, including public education.
The governor stated that the bonding agencies were concerned about this extension and, in order to maintain the Commonwealth’s excellent bonding rating, the agencies needed reductions in the cost of the pension system going forward. This is why the administration believes it needs to make changes to the pension system at this time.
Note that the changes would have no impact on current public employee retirees. The proposal would affect prospective members, as well as some current members. In this fact sheet, teachers and administrators enrolled in the Massachusetts Teachers Retirement System are referred to as “teachers.” Higher education members, who are part of the state system, and preK-12 Education Support Professionals, who are generally part of municipal retirement systems, are referred to as “other Group 1 employees.”
Below is a preliminary summary of sections of the bill that affect MTA members. MTA is doing an in-depth analysis to determine the impact of the bill on current and future members.
Proposals Impacting Current and Future Employees
Creditable Service Buyback
The bill provides strong financial incentives for public employees to buy back creditable service within one year. New employees would have one year from the date of hire to buy back their creditable service. Current employees would have one year from the date of the bill’s enactment. The interest rate charged for service bought back within one year would be 4.125 percent which is the current rate. Participants will be eligible for a payment plan. That rate would double, to 8.25 percent, for creditable service bought back after a year.
The bill limits the annual increase in pensionable earnings to no more than 7 percent (plus inflation) over the previous two years, unless the higher earnings resulted from an increase in hours (such as going from half time to full time) or a change in position (such as being promoted from assistant principal to principal) that is determined by the retirement board to be bona fide. At this time, it is not clear how the various retirement boards will determine whether a new promotion or stipend is bona fide.
As the bill is currently drafted, this rule could apply to higher pay resulting from negotiated salary increases, meaning if an employee’s raises over two years exceeded 7 percent-plus inflation, the portion above that amount would not be pensionable.
The inflation factor is based on the increase in the Consumer Price Index for the prior two years.
Survivor Benefits for Same Sex Marriages
This provision allows retirees who married same sex partners in the first year after same sex marriage became legal to change their retirement options in order to provide benefits to their spouses.
Proposals Impacting Only New Employees
The governor’s pension proposal changes the pension benefit for new employees hired after July 1, 2011, in four ways: (1) by reducing the salary used to calculate the benefit from a three-year average to a five-year average, (2) by reducing the employee’s rate of contribution, (3) by requiring public employees to work additional years to receive the maximum benefit, and (4) by increasing the earliest age one can retire to age 60.
(1) Salary Average for Retirement Calculation
The period used to determine the average salary earnings on which a person’s retirement allowance is based is increased from 3 to 5 years.
(2) Reduced Employee Contributions
Contributions for teachers would be reduced from the current 11 percent to 10.5 percent. Contributions from other Group 1 employees, including higher education employees and ESPs, would be changed from 9 percent to 8.5 percent, plus the current 2 percent on earnings over $30,000.
(3) Employees Must Work Longer
(a) Retirement Age Increased to 60
Under the current law, a public employee can retire at age 55 with 10 years service or at any age if the employee has worked for 20 years. Under the proposal, no one can retire before age 60.
(b) Longer to Reach Maximum Benefit
Employees would have to work longer to reach the 80 percent maximum benefit level. How much additional service would be required varies, as illustrated below.
Higher Education and Education Support Professional Employees
The following examples show how this proposal would affect higher education employees and ESPs hired after July 1, 2011, by comparing when they reach 80 percent under the current law with the governor’s proposal.
An employee who began working at age 22 must work an additional three years.
- Under current law, a member reaches the 80 percent maximum benefit level at age 61 with 39 years of service.
- Under the proposal, an employee who starts at 22 and works for the same amount of time (i.e., retires at age 61 with 39 years of service) receives a reduced benefit: 62.4 percent instead of 80 percent.
- To reach 80 percent under the proposal, an employee must work an additional three years, retiring at age 64 with 42 years of service.
An employee who began working at age 30 must work an additional two years.
- Under current law, an employee reaches the 80 percent maximum benefit level at age 64 with 34 years of service.
- Under the proposal, an employee who starts at 30 and works for the same amount of time (i.e., retires at age 64 with 34 years of service) receives a reduced benefit: 69.7 percent instead of 80 percent.
- To reach 80 percent under the proposal, an employee must work an additional two years, retiring at age 66 with 36 years of service.
Teachers and Administrators
The following examples show how this proposal compares to RetirementPlus (“RP”). RP took effect in 2001 for all teachers and administrators (referred to here as teachers) hired after 2001 and for any teacher hired before 2001 who elected RP. RP reduced the amount of time a teacher had to work before reaching the 80 percent maximum benefit level but increased the teacher’s contribution to 11 percent.
A teacher who began working at age 22 must work an additional three years.
- Under RP, a teacher who began working at age 22 reaches the 80 percent maximum benefit level at age 57 with 35 years of service.
- Prior to RP, a teacher who began working at age 22 could have retired at age 57 with a reduced benefit level of 59.5 percent. To reach 80 percent prior to RP, the teacher would have had to work four more years, retiring at age 61 with 39 years of service.
- Under the proposal, a teacher who begins at 22 cannot retire before age 60 but can retire at age 60 at the maximum 80 percent benefit level.
A teacher who began working at age 30 must work one additional year.
- Under RP, a teacher who began working at age 30 reaches the 80 percent maximum benefit level at age 62 with 32 years of service.
- Prior to RP, a teacher who began working at age 30 could have retired at age 62 with a reduced benefit level of 70.4 percent. To reach 80 percent before RP, the teacher would have had to work 2 more years to reach 80 percent, retiring at age 64 with 34 years of service.
- Under the proposal, a teacher who begins at 30 has to work until age 63 to reach the maximum 80 percent benefit level.
The Legislature will refer the bill to a committee, where it will be scheduled for a hearing. After a hearing and vote by the committee, which could make changes to the bill, the bill must go to the House and Senate floors, where amendments can be added. If the version approved by the House is different from the Senate bill, then it goes to a conference committee, where differences are ironed out. After another vote by the Legislature, it goes back to the governor to be signed or vetoed.
Massachusetts Teacher Pensions: The True Costs and Benefits.