On September 15, 2011, the Senate voted to "modernize" the state pension system.  It raised the retirement age for all future employees and eliminated some provisions that have been subject to abuse.  For example, pensions will be based on the previous five years' pay, rather than the previous three years', to prevent "spiking," or someone taking a much higher position for just a few years ostensibly just to boost the pension.

The reason action was taken very quickly this fall was because the rating agencies threatened to downgrade our bond rating unless we addressed the underfunding of the pension fund.  They estimate that there is a shortfall of $17 billion over the next thirty years.  
One reason for the shortfall is that for many years, contributions were set at lower levels.  (Workers who were hired before 1975 pay 5% of their salary; those hired from 1975 to 1983 pay 7%; and so on.  State employees hired since 1996 pay 9% on their pay under $30,000 and 11% on the rest.  Teachers hired since 2001 pay 11%) 
The second reason for the shortfall is that in many years the state didn't appropriate enough to fund future pensions.  (The state currently contributes about 2.5% of payroll.  Compare this to Social Security, where both employer and employee contribute 6.2%.  Massachusetts as an employer contributes less to pensions than almost any other state, and Massachusetts employees, especially teachers, pay a larger share of their pensions than almost any other state.)
The third reason for the shortfall is the stock market collapse, so that actuaries can no longer assume a high return on investment.  (It’s ironic that the same rating agencies which aided and abetted the growth of risky investment schemes which caused the meltdown are now holding us hostage and telling us to either cut needed programs, raise taxes, or in this case, cut benefits for our employees.)

For more on the state pension system, see "Demystifying the State Pension System."

During debate, those of us who opposed the new plan pointed out that the plan will "save" the state $5 billion over 30 years, but that cost will be borne only by new employees, who will pay higher rates than their colleagues and work longer, and as a group are already paying more into the system than they will take out in benefits.

I offered three amendments:
1. to allow part-time faculty, who now teach a majority of students at public colleges and universities, to join the retirement system.  Many of them work full-time: part-time in two or more schools, and are denied membership in the retirement system.
2. to ensure that no group of employees pays more than 100% of the cost of their retirement
3. to give a small break to beginning teachers.
All were defeated.

These are my remarks about the effect of high contributions on teacher recruitment and quality.

ATTRACTING NEW TEACHERS

This amendment would say that for the first three years of teaching, members’ contributions would be 9% of their pay rather than 11%.

New teacher salaries are the lowest, and their contribution rates are the highest.   They will certainly be contributing more to the pension system than they will ever get, especially since about half of new teachers leave the profession within 5 years.  [Most state employees also leave before vesting; it takes 10 years to vest, unlike most retirement systems, or social security.]

Most of the projected savings are 30 years away.

We can’t affect the contributions or benefits of current employees, so we have to wait till new ones retire to show any "savings."

But the consequences start right now.

People considering public service think not only about their long-term benefits, but also about what their pay checks will be.

It's not just about pensions but about education

We all know, and research confirms, that the most important school contributor to a child’s educational achievement is teacher quality.

We are spending millions of dollars on teacher training and teacher evaluation and many unproven schemes. 

If we believed that future teachers were motivated at all by self-interest, we would consider the effect of teacher pay.

When an insurance company or a hospital wants to justify 6 or 7 figure payments for their executives, they say it’s necessary to attract the best candidates.

Why do we think that doesn’t work in public service?  Why do we think we can ask people to work more hours, with less independence and creativity, cut their long-term pay, and still recruit the best?

I hope you’ve read the studies by Mass Budget and Policy and the Political Economy Research Institute which show that, if you consider age and education, public employees in MA receive less pay than those in private sector.  And even considering benefits, their pay is still slightly less.   Neither of those studies takes into account the higher contribution rates paid by employees hired in recent years, which effectively reduces their pay relative to private sector workers, since they pay 11% rather than the 6.2% they’d pay if they were in social security.  Certainly new teachers are paid less, especially considering that payroll deduction, than people in the private sector.  And none of us in the public sector will benefit from the president’s plan to give a holiday from payroll deductions.

Imagine a college student considering a career in education

Imagine that you know you’ll leave college with an average debt of $25,000 or more.  You know that your  salary as a new teacher will be lower than most of the other professions you could prepare for.  You know that as a new teacher, you’ll be earning less than your colleagues and certainly less than your friends who went into other fields.  You’ll be spending more out of your own pocket on supplies because you don’t already have a library of paperbacks and a collection of art supplies.   You now find out that you’ll be paying more out of pocket if you get sick.  And you’ll be paying the highest retirement rate in the state, probably in the country, almost twice what you’d be paying into social security, and that you’ll be paying more into the pension system than you’d get out even if you were in a defined contribution plan.  You know that your payments won’t benefit you, but will go to pay for people who started work long before you.  You also know that there’s a better than even chance you won’t stay in teaching, either because you're laid off due to budget problems, or because teaching is really hard, or because you find that there are better opportunities.  If you leave, you can reclaim your contributions, but at less than you’d have gotten if you’d invested that money. You certainly won't be vested unless you stay for ten years.

Most young people won’t go through all of that calculation.  But they will if they read the newspapers, talk with future colleagues, and have a basic grasp of math.  And don’t we want to attract into education people who are smart, well-informed, and good at math?  Isn’t that the best thing we could do to improve our public schools?

This is a modest proposal: just the first three years, while their pay is low, their debts and expenses are high, while they’re trying out a difficult field, reduce their contribution to that closer to that of other public employees, who only pay 9% on their first $30,000.

I have no objection to raising the retirement age, and I have supported closing egregious loopholes which led to abuse.  I certainly support funding the system responsibly. 

But I object to a system, which, unlike even a defined contribution system, makes people pay more than they will ever benefit.