Senate approves shakeup of Mass. pension system

Associated Press | 9/21/2011, 12:37 a.m.

BOSTON — The Massachusetts Senate last Thursday approved an overhaul of the state’s pension system that pushes back the retirement age for future public employees and changes the formula for how pension benefits are determined.

The bill aims to save the state $5 billion over the next 30 years and reduce the state’s $17 billion unfunded pension liability. It passed by a 24-10 vote.

“We need to do this to maintain the health of the commonwealth’s pension system and the integrity of the benefit that our employees depend upon,” said Sen. Katherine Clark, D-Melrose, who introduced the bill.

The bill estimates savings of $3 billion for the state and $2 billion for municipalities over the next 30 years by raising the minimum retirement age for most state and municipal employees from 55 to 60 while increasing the minimum age for receiving the maximum pension benefit from 65 to 67.

The changes begin with workers hired after Jan 1, 2012. It also reduces some incentives for early retirement. An amendment adopted by the Senate would boost the retirement age by one year every six years for employees hired in that six-year period.

The bill must now be approved by the House before moving to Gov. Deval Patrick’s desk. Patrick, who has called pension reform one of his top legislative priories, filed a similar proposal in January.

Pension benefits under the proposal would be based on the average of an employee’s five highest wage-earning years, replacing the current three-year formula.

Critics of the current formula say it has prompted abuse by workers who accrue many years of service at low pay, then seek a high-paying job for just three years, allowing them to receive a benefit much larger than the overall contribution they made to the system.

Proponents of the changes say this will help the state cover its unfunded liabilities, which are scheduled to be funded by 2040. Earlier this year, the Legislature and the governor agreed to extend the schedule for fully funding the pension system from 2025 to 2040 to save the state $800 million in the current fiscal year, but with a potential cost to the state of $30 billion between now and 2040.

Fully funding the pension system would also help the state maintain its bond rating. A high bond rating allows the state to borrow at a low interest rate.

“A strong rating turns into savings for the commonwealth of millions in a year that we can invest in our roads and bridges, our schools and our other programs that we care about,” Clark said.

Massachusetts currently has a rating of AA-plus from Moody’s and Fitch, one notch below AAA. Standard and Poor’s has given the state a rating two notches below AAA but with a positive outlook.

Critics of the bill said the state could find savings through other methods. Public employees should not lose benefits because the state did not set aside enough money during good times, they say.

“We haven’t been paying our share of the debt we owe on our unfunded liability,” said Sen. Kenneth Donnelly, D-Arlington, who filed several failed amendments that would have protected employee benefits.