Can Maine’s Pension Crisis be Solved?

Can Maine’s Pension Crisis be Solved?

August 15, 2010 Posted by J. Scott Moody - No Comments

Can Maine's Pension Crisis be Solved?In my previous blog, I highlighted a new study showing Maine’s pension crisis is worse than reported.  In a follow-up study, Robert Novy-Marx and Joshua D. Rauh, examine various policy options that can be used to reduce the pension liability.

While they discuss a number of options, there are really only two that could be used to make a significant dent in pension liabilities.  First, if all cost-of-living adjustments were eliminated that would shave off over 22 percent of current pension liabilities.  Second, they estimate savings under “social security parameters” which would increase the full retirement age to 67 years, increase the early retirement age to 65 years and implement early retirement age buyouts.  Under these parameters, another 22 percent could be saved.

However, as dramatic as these changes will seem to some, the authors conclude on this sour note:

“Even relatively dramatic policy changes, such as the elimination of COLAs or the implementation of Social Security retirement age parameters, would leave liabilities (for the 116 largest pension plans in the country) around $1.5 trillion more than plan assets under Treasury discounting.  This suggests that taxpayers will bear the lion’s share of the costs associated with the legacy liabilities of state DB (defined-benefit) plans.”

Keep in mind three things. First, the extent that any of these changes that can be made to existing employees and pensioners vary by state.  In this blog I’m not attempting to detail the political/legal reality of these options in Maine, I’m only trying to reveal the extent of the pension hole Maine taxpayer’s face.

Second, let’s not forget the key to getting the pension liability under control is to first stop digging the hole deeper.  The current defined benefit system must be scrapped and a defined contributions system put into its place for new employees.

Finally, Maine’s state government workforce is bloated by approximately 4,497 people in 2007.  Permanently eliminating these positions would not only save money today of approximately $190 million, but it would also reduce Maine’s pension liability.  And, the money saved could be reinvested back into the pension system in hopes of making it solvent with as little involvement of taxpayer dollars as possible.