Hands off pension system this election year

January 16, 1998|By Jeff Hooke

THE bull in the state's fiscal china closet this legislative session may be the massive pension boost that state employees and public school teachers are seeking.

Under the present pension system, after 30 years, an employee making $34,000 a year receives $10,000 annually upon retirement. Under the improved plan, that pension would be increased to $15,000 per year. Assuming Social Security benefits and possible income from savings, future retirees would replace a sizable portion of their income.

Young retirees

Also, state workers may retire after 30 years' service regardless of age. So a worker who began service at age 22, may retire at 52 and collect a full pension for many years. The cost of state pensions is thus magnified in comparison with the private sector, which typically has a higher minimum retirement age.

Pension-boost proponents say it would cost $3.1 billion. But that amount wouldn't immediately be tacked onto the budget. Instead, it would be spread over many years; the revised benefit scheme would cost an extra $8 billion over the next 40 years.

This would permit legislators to tax future generations to pay for the pension boost, yet reap immediate political gains. So, naturally, lots of politicians like this idea.

But Maryland taxpayers ended up footing the bill for a similar pension boost before. In the 1970s, legislators increased pension benefits during an election year without allocating the requisite funds. By the mid-'80s, the pension system was $8 billion in the red. Furthermore, the bond-rating agencies suggested that the deficit threatened the state's AAA bond rating.

Caught between a rock and a hard place, the state increased payments to the fund by hundreds of millions of dollars annually, thus contributing to the state's high tax profile.

Despite the rescue, the system's hangover continues today. In June, the ''present value'' deficit was a substantial $4 billion.

The proponents of the pension increase provide three key arguments in support of their position. But like many proposals floating around Annapolis, there's little hard evidence behind the claims. Consider their argument:

Fairness: Maryland has one of the ''worst'' pension systems for public employees in the nation, ranking 47th among the states. They conveniently forget that Maryland's employees contribute less than 1 percent of payroll to their pension plan. Nationwide, state employees contribute an average of 5 percent of payroll to pension plans. If Maryland's employees contributed the national average, the state would rank 25th in the country.

Employee retention: Higher pensions are needed to retain teachers and good state employees. However, no proof of rising turnover is offered. State Del. Howard P. 'Rawlings, chairman of the House Appropriations Committee, noted that pensions weren't a significant issue in recent collective-bargaining discussions.

Attracting employees: Besides the competition for computer programmers, supporters present no evidence showing the state has a recruitment problem because of its pension plan. Indeed, many of today's workers prefer portable pension packages, such as 401(k) plans that move with employees as they change jobs. Maryland's system promotes a 30-year tenure, which is out of touch with current and future employment trends.

Problems exist, too, with the way proponents plan to pay for improved pension benefits:

Greater returns on investments: They assume the current bull market in stocks will continue indefinitely. Unfortunately, the stock market goes through cycles -- up and down. If the market doesn't continue to increase, Marylanders will be pressed to make up the difference.

Reallocate assets: Because of the rise in stock prices, the pension fund's market value is 10 percent higher than expected. Pension-boost supporters would like to see this bonus used to improve pensions; that would be like tapping your child's college fund, after a good investment year, to buy yourself a car. It's a tempting proposition but sets a bad precedent.

Employee contributions: Employees would chip in 27 percent of the cost of the improved pension plan. The state would pay the remainder of the cost, meaning either taxes would be raised or spending for other programs diverted to pensions.

Bargaining issue

There's a twofold problem with tinkering with the pension system this way. First, state employees and local teachers fought hard for collective-bargaining rights. Now, many of these same groups are pushing for an increase outside of the collective-bargaining process, where the state might logically trade pension enhancements for increased productivity. For example, Maryland state employees receive 15 sick-leave days and 15 personal-leave days or holidays per year, or 30 total days. This generous policy has six more days than the 24 days federal employees receive. Also, it represents an item for negotiation.

Second, tinkering with the pension fund's actuarial assumptions during an election year is dangerous. Elected officials are tempted to go along with such a request to gain votes, without the requisite consideration of long-term effects. With $24 billion in assets and 200,000 participants, the pension fund can't be trifled with. It's like a huge aircraft carrier. One small error in navigation can mean a long and expensive course correction in the future.

Jeff Hooke is an author, business consultant and adjunct professor at the University of Maryland, College Park business school. The Baltimore native writes from Chevy Chase.

Pub Date: 1/16/98

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