September 2021 Voice: When the proper funding of our 104 public retirement systems began in 1985, the majority of Massachusetts systems were woefully underfunded. Back then the Commonwealth was the 2nd worst unfunded system in the country – second only to West Virginia!
Today, some 35 years later, the situation is starkly different. Without exception, all 104 systems are on track to be fully funded by 2040, the state’s statutory deadline. However, nearly 1/3 systems are now on pace to be fully funded by the end of this decade, a full 10-years ahead of schedule.
The success of our public pension systems is due to three key factors: high employee contributions, a commitment to proper employer funding, and strong investment returns.
This amazing progress is attributable, at least in large part, to the high level of pension contributions paid by active employees since 1975, when the contribution rate for new hires jumped from 5% to 7% of salary. Social Security, in which Massachusetts public employees do not participate, has charged a contribution rate of just 6.2% since 1983. The Massachusetts rate then jumped to 8% in 1984 and 9% in 1996. Employees with salaries over $30,000 pay an additional 2%.
Since July 1, 2001, teachers participating in Retirement Plus contribute a flat 11% of their salary into the Mass. Teachers Retirement System. State Police, hired on or after 1/1/96 contribute a flat 12%. These two contribution rates are among the highest in the country and nearly double that required under Social Security.
Employee contributions, combined with the efforts of the legislature, governor, treasurer, and auditor – along with organizations like Mass Retirees and the public employee/teacher unions for nearly four decades – to maintain funding of the employers’ share of the pension obligation has made a profound difference since 1985. That’s about when the modern pension funding schedule was largely adopted across Massachusetts.
A long list of local officials also helped lead the way in committing to fully funding annual pension appropriations, instead of allocating local tax dollars elsewhere. For instance, the City of Boston is now close to full pension funding due to the efforts of former Mayors Ray Flynn, Tom Menino and Marty Walsh to closely adhere to the city’s aggressive pension funding schedule. Towns, like Wellesley, benefited greatly from forward-thinking local officials such as Arnold Wakelin, who focused on funding the town’s pension obligations well before it was popular to do so.
EXCEPTIONAL INVESTMENT RETURNS
Arguably, the span of the past ten years has brought the best investment returns of the 35-year running tally dating to 1985. As the charts on pages 9-11 illustrate, across all 104 retirement systems the 1, 5, 10 and 36-year investment returns far exceed benchmarks.
Over the past decade predictions by economists and investment consultants of a slowing global economy have led to a dramatic lowering of the assumed rate of investment return for the state, teachers and local retirement systems. Assumed rates of return, which had been as high as an annualized rate of 8.50% in 2012, have been lowered as far as 5.50% (Leominster). The Commonwealth’s PRIM Board now uses an assumed rate of 7%, down from 8.25% in 2012.
Now 100% fully funded, Leominster posted a return of 12.63% in 2020. The city’s 5, 10 and 36-year returns are 10.37, 9.31 and 8.76% respectively. During that same period PRIM returned 12.61, 10.42, 8.97 and 9.62% respectively. Annualized, both system’s returns are significantly higher than the assumed rate and far exceed the rates needed to fully fund the systems.
The latest composite returns across all 104 retirement systems demonstrate strong investment returns that far outpace expected annualized rates of return.
“What an amazing degree of success our retirement systems have demonstrated over the past 36 years. Back in 1985, no one could have envisioned where we would be in 2021. However, the groundwork that was laid back then and in subsequent years through the pension funding schedules, retirement law, oversight and sound investment practices have really paid off,” remarks Association President Frank Valeri, also an elected member of the State Retirement Board. “A large degree of the credit for where we find ourselves today has to go to my predecessor Ralph White, who founded Mass Retirees in 1968. Being a force of nature, Ralph played a defining role in the creation of the modern retirement systems and ensuring that the government maintained its commitment to fully fund its share over the years.
“Given the results of the past decade, combined with what we are currently witnessing in 2021, we now know that predictions of an economic slowdown as the means to justify a far more conservative investment return assumption were just plain wrong. While the past does not dictate the future, it should be clear that the assumed rate of return is likely lower than is necessary and should not be reduced further. The facts simply do not justify going any lower.”
Pension funding schedules are based on a series of assumptions designed to accurately predict the future financial obligations to be placed on the retirement system and ensure the fund’s sustainability over time. These assumptions, which include asset returns, member life expectancy, wage inflation, among other factors, including the annual COLA, are updated every two years.