September 2021 Voice: There is no question that the tremendous investment success of the Commonwealth and local retirement systems should be celebrated. When modern pension funding schedules were implemented in the mid-1980s, no one could have envisioned the high level of asset gains that would come to fruition over the ensuing 36 years.
Given the fact that Massachusetts public employees do not participate in Social Security, the investment success of our public pension systems is extremely important. For most public retirees, their pension is the primary – if not only – source of retirement income.
As we spell out in the accompanying article below, payroll contributions from active employees (now averaging some 10% of salary) have steadily accelerated pension funding since the mid-1970s. The state, along with most cities and towns, did not begin to properly fund the employer’s pension contribution until pension funding reform in the mid-1980s.
Thirty-six years later, it is clear that these funding reforms not only worked, but far exceeded the most optimistic expectations. Those pension and retirement policy officials working within the Massachusetts’ systems for the past four decades should be applauded for a job well done.
Since 1985, the Commonwealth’s Pension Reserves Investment Management (PRIM) Board has earned an average of 9.62%. This is more than 2.6% higher than the system’s current assumed rate of return, which places Massachusetts on an aggressive pace to fully fund its pension obligations by 2036 – if not sooner.
Statewide, the pension funding outlook is just as strong across all 104 public retirement systems with the composite 36-year return coming in at 9.32%.
Combined, these returns have generated billions in excess investment gains that are well above the levels needed to fully fund the retirement systems.
The 1, 5, 10 and 36-year returns also serve to throw cold water on predictions of a global economic slowdown that would result in suppressed asset gains. These predictions, which took hold in the aftermath of the Great Recession, have resulted in the Commonwealth and many local retirement systems significantly reducing the assumed annual rate of investment return.
Since 2013, the state has reduced PRIM’s assumed rate of return by 1.25%, from 8.25% down to 7% in 2021. This has directly impacted the system’s unfunded liability, adding nearly $11 billion in new liabilities in just 9 years which has resulted in suppressing the funded ratios of the State and Teachers’ Retirement Systems.
With the historically high investment gains experienced as the world emerges from the global pandemic, it is time to pause any further reductions in the assumed rate of investment return. The evidence simply does not support predictions of a domestic or international economic slowdown.
It is also about time that the tremendous asset gains of our retirement systems be shared with public retirees – the very people who worked to fund the system and who now rely on the system.
It is no secret that our retirees are finding it increasingly difficult to make ends meet. Despite the compounding effect of the annual COLA, the modest yearly increase
cannot keep pace with inflation. Basic Medicare premiums alone have increased $48 a month since 2013. As we explain within the article on page 6 & 7, growth of the COLA benefit has been curtailed due to the restraints imposed by rigid pension funding schedules.
However, the time has come to share the amazing historical investment success with retirees, for whom the retirement system exists to serve. Mass Retirees believes that this shared success should take the form of improved and expanded COLA benefits for retirees.
Our Association proposes a two-step approach for COLA improvements. First, the traditional COLA base to which the annual benefit is applied should continue to be incrementally improved on an ongoing basis.
Second, we have proposed the creation of an additional Enhanced COLA benefit designed to help long-term public retirees catch up with inflation. This enhanced or “Senior” COLA benefit would kick in beginning after 15 years of retirement for retirees who had at least 20-years of public service prior to retirement.
If history is a guide, it is safe to assume that we will soon witness some municipal and state officials proposing that excess pension fund earnings be used to reduce the government’s appropriation to the retirement system. A reduction in government funding should only take place in coordination with retiree benefit enhancements.
By not participating in Social Security, Massachusetts state and local governments do not pay the mandatory 6.2% federal payroll tax – a savings of more than $700 million per year! Successful pension investment practices, which are largely funded by public employees’ contributions, should not result in the government using excess gains as the means to supplement the employer’s responsibility to fund the system.
Operating outside of Social Security should not absolve the employer of the responsibility to contribute its share toward an employee’s retirement nor of the need to provide a meaningful COLA benefit. Now is the time for these issues to be addressed.
In the past year alone, the state’s PRIT Fund has grown by $20.7 billion. Local retirement systems, many of which invest within PRIT, have done just as well. These historic gains, along with the success of the past 36 years, must be shared with the beneficiaries for whom these funds exist.