The need for good research on pension reform
(Originally posted on 7/10/13)
A pair of recent reports from the Economic Policy Institute (EPI) on Rhode Island’s reforms to its retirement plans for public employees reminded me of a satirical news article on lobbying efforts by religious fundamentalists to overturn the second law of thermodynamics. The title of one of the reports, “Rhode Island’s New Hybrid Pension Plan Will Cost the State More While Reducing Retiree Benefits,” seemed to suggest that the report’s author had managed to repeal the laws of arithmetic. What sort of deliberate change to a retirement system could lead to more money going in and less money going out?
The answer is that the reports, one by Demos’s Robert Hiltonsmith and the other by EPI’s Monique Morrissey, offer some useful background information on pension reform in Rhode Island, but fail to provide sufficient evidence to support this striking conclusion. A careful analysis of the effects of a particular pension reform on benefits provided to public employees and costs incurred by taxpayers would entail detailed calculations under a range of possible assumptions. The level of benefits and their costs to taxpayers depend on many factors, including when employees retire, how long they worked, how long they live after retirement, and the investment returns on pension funds.
On the benefits side, a serious analysis would estimate the pension wealth of employees, based on how long they work for the state, before and after the policy change. Hiltonsmith misses the mark by simply providing estimates of yearly retirement income for an employee who spends her entire 30-year career working for the state of Rhode Island. This is the headline finding, but Hiltonsmith acknowledges that 30-year veterans are far from typical, noting that they receive annual pension benefits more than twice as large as the average state employee. Likewise, Morrissey’s report indicates that “the hybrid plan may provide more valuable benefits to some workers, including some mid-career job leavers.”
Read more about TIA's pension reform efforts on TruthInAccounting.org.
