State Government

Pearce plan cuts pension shortfall, keeps defined benefits – but it’s not pain-free

By Guy Page

Recommendations proposed by State Treasurer Beth Pearce would, if successfully enacted, reduce the pension fund shortfall and maintain defined benefits, she said in a January 15 report.

Beth Pearce

However, the retirement payout for current employees would likely be smaller, while the shortfall would be reduced by “only” $2.2 billion. The entire pension fund shortfall is $2.9 billion. 

Pearce made the recommendations as the Scott administration waits for the results of a pension fund “stress test” now underway by the Pew Charitable Trust’s Public Sector Retirement Systems Project. Pew’s involvement is looked on with suspicion by the Vermont State Employees Association, who note the think-tank’s bias towards defined contributions but not defined benefits. In other words, employees know how much for retirement is being deducted from their paycheck, but the actual payout would not be guaranteed. 

Pearce’s recommendations would:

  1. Maintain a defined benefit system for all current employees and retirees. 
  2. Benefit changes would not affect current retirees, only current employees. 
  3. Continue employee contributions as set by actuaries. 
  4. Reduce cost of living increases for active employees upon retirement, increase employee contributions, and/or increase age/years worked requirements for pension eligibility.
  5. Spend federal pandemic economic recovery funds, if available, on pensions and reducing the pension shortfall.

Pearce doesn’t sugar-coat the pain: “The implementation of these proposals will significantly reduce benefits and increase employee contributions. From a risk sharing perspective, employees are taking on a substantially greater portion of the actuarial losses.”

The decision to accept any of these proposals is up to the state pension investment boards, and to the Legislature. 

4 replies »

  1. The ONLY way to solve this fiscal armageddon is to establish a defined contribution pension system for all new hires.
    There can be a reasonable “employer match” of 3-5% but the combination of the the present system and the fact that Vermont has WAY TOO MANY state workers is a recipe for state bankruptcy.

  2. Whatever the ‘system’, whatever the ‘plan, whatever the ‘benefits’… the only way to fix the problem is to eliminate the monopolies in which they exist, and allow free market competition. Without free market competition, it is impossible to know how many employees are the right number, how much they should be paid, or what their benefits should be. It doesn’t matter how fast you may think you’re running. If it’s slower than everyone else, it’s too slow.

    Break the monopolies, save the State, save its citizens.

  3. Here’s the deal. If a teacher earns $56,000, on average, over a 25 year period, pays 5.5% into their retirement account, the total principle investment equals $75,000. At a 4% annual rate of return, that investment is worth $124,937 after 25 years.

    If the teacher retires and has $124,937 in the bank, still earning 4% annualized interest, the annual interest return is $5000 per year, without spending any principle.

    Now then, “for example, a teacher who works for 25 years with a final average salary of $70,000 would be eligible for an annual pension benefit worth 50 percent of their average final salary.” That’s $35,000 per year.

    Given that the 4% rate of return on the teacher’s investment nets $5000 per year, where does the remaining $30,000 come from?

    Well, the amount of money in a bank account needed to provide an annual $30,000 return at 4% interest is $750,000. And an actuarial model assuming the retiree lives 25 years after retiring at 60 years of age would indicate that paying out the principle, with zero interest, at $30,000 each year would equal the $750,000 in the bank account. After 25 years there would be a zero sum balance …. not counting any interest earned.

    So, at a 4% rate of return on that bank account, as its being reduced over the 25 year period, the account produced $50,000 in interest. In other words, after 25 years of retirement payments equaling $35,000 per year, there should be $50,000 still in each teacher’s bank account, if the plan has been fully funded.

    OK. So, who funds the $750,000 nest egg the teacher didn’t pay? You guessed it. It’s the employer’s contribution. Yes, that’s the State. It’s the taxpayers.

    Using the 4% rate of return assumption, the State has to invest $30,000 each year, for each teacher, to create the $750,000 nest egg required to fund the balance of the teacher’s annual retirement payment. If there are 80,000 students in Vermont with a 10 to 1 student teacher ratio, there are 8000 teachers for whom the State must contribute $30,000 per year – IN ADDITION TO THEIR SALARIES AND BENEFITS. The State’s retirement contribution for teachers alone costs Vermont taxpayers, give or take, $240 Million per year, again – IN ADDITION TO THEIR SALARIES AND BENEFITS.

    And if interest rates are less than 4% per year, the liability increases. And this doesn’t count the 8000 or so non-teacher employees in the State’s public school system who have similar, albeit less expensive, retirement plans.

    Now let’s consider government workers not employed in the education system. There are 8000+- people employed in the State government.

    Are you starting to get an idea of what this Ponzi scheme looks like?