For Immediate Release: 5/1/2017
Contact: Zachary Janowski
Mobile: (860) 384-5777
Pension reform would save more than $300 million in two years
Pensions can be a big part of the solution
May 1 – With Gov. Dannel Malloy looking for $1.5 billion in state employee union concessions over the next two years, he should focus on pension reform for major savings – even in the short run.
As a large, fast-growing expense, state employee pensions offer big opportunities for significant savings, even over the next two years.
- Increase state employee contributions to the national average = $290 million in savings over two years
- Set 2 percent maximum for cost of living adjustments = $100 million in savings over two years
- For new hires, cap pensionable pay at $100,000 = $40 million in savings over two years
Malloy’s warning has been clear: if he can’t reach a deal with union leaders, state employees are once again in danger of layoffs, which affect newer state employees most of all.
Unfunded pension liabilities are one of the biggest contributors to the state’s fiscal mess, but it doesn’t have to be this way. Even modest changes to the pension system could help solve Connecticut’s current budget crisis – without laying off state workers.
Securing Our Future: A Menu of Solutions to Connecticut’s Pension Crisis offers a range of cost-saving solutions that could save Connecticut $10 billion over the next 20 years. Read the study here.
Backed by a full actuarial model, the ideas and projections put forth in this study can save Connecticut’s budget and prevent state worker layoffs.
The report, commissioned by Yankee Institute, was written by Anthony Randazzo and Daniel Takash from the Reason Foundation’s Pension Integrity Project and Adam Rich, a Fellow of the Casualty Actuarial Society and resident of South Windsor.
Securing Our Future shows that even minor changes to the pension system could save jobs and state services.
- Most Connecticut employees currently contribute 2 percent of their pay toward the pension system, far below the national average of 6 percent. Raising the contribution rate to the national average would save $290 million over the next biennium.
- Setting a 2 percent maximum cost of living adjustment would save the state an additional $100 million in the next two years.
- Adopting a $100,000 pensionable pay cap for new hires would save $40 million in the next two years.
Those three minor and reasonable changes would reduce pension costs by more than $300 million over the next two years. In 10 years, those savings grow to billions. That will save jobs and vital state services now and in the future.
“It’s not right that young state employees should have to suffer and face layoffs when a few small changes could save their jobs,” said Carol Platt Liebau, president of the Yankee Institute. “Should we really cut services to preserve a two percent pension contribution for senior workers while newer workers pay the price?”
“The reality of Connecticut’s underfunded pensions are no longer a future problem – it’s a problem now. And we have to be prepared to make changes.”
“I think it’s time that we make some reasonable changes that recognize that these are difficult times and it’s not going to get any better by maintaining the status quo,” said Suzanne Bates, Yankee Institute’s policy director.
Teacher pensions, another fast-growing component of the state budget, also present opportunities for reforms that could save millions and provide more reliable benefits for Connecticut’s teachers. For example, allowing new teachers to participate in Social Security would increase retirement benefits for teachers who work less than a full career, slowly increase municipal participation and reduce costs for the state.
More substantive changes in the future
The minor and reasonable changes listed above, however, should not preclude more substantive changes that could be made to the pension system. As the authors of the study note, “Connecticut must resist any temptation to enroll new hires into the existing, broken system.”
Adopting any of the following changes to the pension system could ensure an equitable and sustainable retirement system for both state employees and taxpayers in the future:
- Create a Tier IV defined benefit plan based on more conservative actuarial assumptions and cost sharing for unfunded liabilities.
- Offer a cash balance plan which would guarantee investment returns for employees and share returns above the assumed rate.
- Allow new employees to choose a defined contribution plan or a hybrid plan.
- Enroll new hires in a defined contribution plan.
Whatever mistakes have been made in the past by governors and union leaders should not continue to dictate Connecticut’s future. We can make changes to the pension system to deal with today’s reality and tomorrow’s possibilities for our great state.
The Hartford-based Yankee Institute for Public Policy works to transform Connecticut into a place where everyone is free to succeed.