2021 marks 25-years since then-Treasurer Jim Douglas recommended that the state change its trajectory from costly “defined benefit” retirement plans for state employees and teachers to “defined contribution” plans. Eleven years ago, in 2009, a special commission suggested a consideration of this same idea. I have previously written about our pressing need to consider a defined contribution option, as well as the “sleeping giant” of our unfunded liabilities.
Unfortunately, since the time I wrote my opeds in 2019, Vermont’s unfunded liabilities have ballooned from $4.5 billion to more than $5 billion.
That increase has occurred despite repeated assurances from current Treasurer Beth Pearce that all was well — the Legislature simply needed to make its yearly obligated payments to the pension system, and all would work out fine. According to her, there was no need for structural pension reform.
But it turns out, she was incorrect.
Despite fully-funding all of our pension obligations since the mid-2000s — and actually pre-funding our obligations in some years — we now find ourselves in a deep hole. Due to projections that our unfunded liabilities will grow by another $600 million, Treasurer Pearce is calling for painful cuts to retirement benefits for our state employees and teachers.
Naturally, the Vermont NEA and the Vermont State Employees Association are opposed to cutting these benefits for already-vested members — as they should be. I’d be mad too. The state made promises to their members, and we should keep those promises.
The unfortunate reality is that only now are politicians like Pearce starting to realize that it might be time to change the nature of the promises we’re making to future retirees. In addition to myself, folks like Jim Douglas, David Coates and others have been sounding this alarm for years.
To be fair, it’s not all Pearce’s fault. She inherited a system that had been drastically underfunded during the 1990s. But she kept up inflated assumptions of rates of returns on pension funds, defended the disastrous “select-and-ultimate” rate system, and, as noted above, has resisted fundamental pension reform.
The way I see it, we have two choices: slash benefits and break our promises as Pearce is proposing, or make fundamental changes to restore the integrity of our pension system. If we want to pursue the latter option — a far less painful reality — here are five simple steps we can take:
First, follow the path of other states with distressed pensions, and move to a defined contribution system for all new state employees and new teachers. Yes, a new DC plan may cost more at first. But over the long run, this will save the state resources, give employees direct control over their retirement investments, reduce the vesting period, and increase portability of benefits.
Second, deal with other post-employment benefit liabilities by terminating the current program, and sending all state employees to the health exchange. If Vermont’s individual health care market is good enough for the average Vermonter, then why is it not worth pursuing for, say, state bureaucrats?
Third, follow the bipartisan idea proposed by Rep. Linda Joy Sullivan (D-Dorset) to impose a 1 percent tax on retirement allowances until the retirement system reaches an 80 percent funded level.
Fourth, slightly raise the state retirement age from 65 for full retirement benefits to match the Social Security retirement age sliding scale of 66 to 67 (depending on one’s year of birth). This could defer retirements and keep individuals paying into the system longer.
Fifth and finally, change employee contribution rates to retirement plans. For all defined benefit and defined contribution plans, the state should increase employee contributions by 0.5 percentage points across the board to improve solvency.
To summarize: stop the bleeding by switching from DB to DC; get other post-employment benefit liabilities under control by moving retirees to the exchange; finance pension expenses with a temporary, 1-percent tax on retirement allowances; raise the retirement age by 1 to 2 years to defer retirements; and increase solvency by slightly adjusting contribution rates.
We have a way out that doesn’t involve breaking our promises to our retirees. At the very least, Treasurer Pearce and the Legislative Majority should consider these options rather than slashing benefits. We can’t let personal pride — and the failure to admit that the defined benefit approach was wrong — stop us from making the right choices today.