Massachusetts Senate Approves New Pension Rules, Changing Benefits Calculation

(September 16, 2011) — The Massachusetts Senate has approved an overhaul of the state’s pension system.

The bill aims to save the state $5 billion over the next three decades while lowering the state’s $17 billion unfunded pension liability.   

The Massachusetts proposal would increase the minimum retirement age for most public employees from 55 to 60. Additionally, it would increase the retirement age for maximum benefits from 65 to 67 while also changing the way benefits are calculated. Under the proposals, benefits would be analyzed based on a worker’s top five years of earnings as opposed to the current practice of basing it on the top three years.

The changes would apply to state employees hired after Jan. 1, 2012.

Following the approved reforms, Senate President Therese Murray (D-Plymouth) stated: “We made a commitment, after eliminating many the worst offenses two years ago, to come back and address the more complicated issues in our pension system. This bill makes changes that are necessary for reducing our unfunded pension and retiree health liabilities and contains realistic modifications for modernizing our system. A modern pension system is essential to maintaining and improving the Commonwealth’s already strong bond rating.”

Despite the reforms, a fiscal watchdog group has warned that the proposal could place the state pension system’s bond rating in jeopardy. “The Massachusetts Taxpayers Foundation strongly urges you to reject any amendments to the proposed pension reform legislation that would lessen the savings included in the bill. In its current form, the proposal achieves approximately $5 billion in savings, the minimum goal set forth by the ratings agencies,” wrote Michael Widmer, president of the nonpartisan, business-backed organization in a letter sent to the state Senate.

Unions, including the Massachusetts AFL-CIO, the Massachusetts Teachers Association and the Retired State, County and Municipal Employees Association, have also criticized the proposal.

“The unfunded liability is a serious problem, but it was incurred decades ago when pensions were funded on a pay-as-you-go-basis and insufficient funds were set aside. The problem was not caused by future employees, and they should not be required to receive smaller pensions because of it,” a letter written by the Public Employees Coalition on Public Employee Pensions to members of the state Senate stated.