The recent closing of the Benny’s stores in southern New England prompted my thoughts on the long-term retirement planning for public and private employees. The majority of those working in the private sector have for decades partnered with their employers in funding their own retirement planning, this includes such plans as 401(K) investments and other financial set-asides. Unfortunately, the days of company pensions in this sector are long gone. In fact, private sector pensions began disappearing in the 1980's and today, less than 15 percent of private companies offer them. The same, however, is not true in the public sector, and that is what I want to discuss in this blog.
Pension plans for public sector employees are still very much alive but are on life support in most states. These plans, known as Defined Benefit plans or DBs, promise to take care of workers into retirement. Public sector employees are promised a fraction of their highest salary that is supposed to be paid for the remainder of their lives. This also includes, in many cases, medical and life insurance plans.
On paper, these plans sound very good and had worked in the mid to late twentieth century, but as life span increased and more public employees were hired the system became overwhelmed and underfunded. There are a number of reasons for the current state of employee pensions and they include creative State and local accounting practices, political promises that were not realistic or based in fact, local governments that underfunded these systems or took from them to fund other budgetary shortfalls and trustees who made promises on the backs of future retirees.
In reality, pension plans have always presented as a problem and the simple reason is that they are backloaded. This means that payments pledged for the future are are based on money not yet collected. As with most politically based systems (make no mistake about it, politics have played a huge part in this), it’s easy to overpromise today because the ones making those promises are usually long gone and have no responsibility when the price becomes due.
Public sector employees are counting on what they have been promised and because many , often the police and fire employees, have not contributed to the Social Security system, they have nothing to fall back on. Sadly, if this system fails, those who have served us proudly will be in deep trouble.
So what is the state of our local pension systems? Let's take a look.
In Rhode Island, the two largest pension systems, the teachers and state employees, were funded at 56 and 58 percent respectively as of June, 2016. For state employees, there existed an underfunded liability of nearly $2 billion and for the
teachers, a whopping $2.7 billion remains unfunded.
According to the state’s current Governor, Gina Raimondo, these shortfalls are supposed to disappear over the coming decades through increased taxation and investment returns. Problem is, Rhode Island is losing its population in part due to high taxes and lack of opportunity. In fact, the population is disappearing so fast that the state may lose a Congressional seat. Not good news when depending on future growth and increased tax collections to fund the pension system.
Connecticut also has its problems when it comes to pension funding. According to the Yankee Institute for Public Policy, that state’s outlook appears even bleaker than that of Rhode Island’s. The Nutmeg State’s pension liability for state workers has grown to nearly $21 billion with the pension system only 37 percent funded. The Institute reports that the state’s pension has faced “decades of underfunding” due to shortfalls and deals struck between governors and union leaders. It should also be pointed out that the unions have no choice under law but to accept pension underfunding in times of fiscal distress.
In Massachusetts, the City of Springfield is in deep financial trouble. The Boston Business Journal reports that the city has saved just $1 for every $4 it has in pension liability that it owes its nearly 6000 current or future retirees. The Journal further reports that Springfield is just the “tip of the pension iceberg for the U.S.S. Commonwealth”. In Boston, the unfunded liability for its teacher’s union is $2 billion with just 40 percent of the pension liability funded.
In fact, the Public Employee Retirement Administration Commission states that 20 of Massachusetts’ 104 pension plans have fewer than $1 saved for every $2 owed. Dozens more are below the 70 percent threshold, which is considered a healthy pension system. Only the town of Belmont has generated the kind of investment needed to totally fund its pension plan.
As bad as it is here, there are states that are in worst shape. Bloomberg Business News reports that New Jersey has the most underfunded pension plan in the country followed closely by Illinois.
New Jersey has $135.7 billion less than it needs to cover all its public pensioners while in Illinois, their underfunded system has reached nearly $120 billion. But before we feel too proud, Bloomberg’s top ten of underfunded pension systems include Connecticut, Rhode Island and Massachusetts.
So, should public employees be worried about these underfunded systems? Absolutely! Let’s look at two cities that were forced to slash its pensions with one being right here in Rhode Island.
First, we’ll go to the Motor City. Detroit turned out to be the largest municipal bankruptcy in the history of this country. Filing for bankruptcy in 2013, its pensioners faced a cut of nearly 5 percent while their health care benefits were reduced and the cost of living raises were eliminated. Although the pensioners attempted to challenge the cuts in court, their challenge was rejected at the federal level.
Right around the corner in tiny Central Falls, Rhode Island, its retired workers saw their pensions reduced by as much as 55 percent following the filing of bankruptcy in 2011. The state did step in, however and reduced the cuts to 25 percent for the first five years. At the time of the bankruptcy filing, Central Falls' pension system was $80 million in debt. Those who worked hard and looked forward to a secure and comfortable retirement were forced to return to work to pay their monthly bills.
So, here’s the truth - the only secure plan is a fully funded plan and based on the numbers, such plans are becoming increasingly scarce as cities and states face fiscal stress, much of which is of their own doing. Public employees are not responsible for this problem but they are facing more and more uncertainty about their future which is why alternative planning needs to occur long before retirement becomes a reality.
Investing wisely and planning for the future is the most important thing that someone with a pension plan can do today. Using estate planning tools and long-term care planning can provide some peace of mind for those with concerns about their retirement. We certainly can help those with such concerns plan for the future. They have worked hard for it and they certainly deserve it.
Attorney Connelly practices in the area of elder law. This area of law involves Medicaid planning and asset protection advice for those individuals entering nursing homes, planning for the possibility of disability through the use of powers of attorney for the both health care and finances, guardianship, estate planning, probate and estate administration, preparation of wills, living trusts and special or supplemental needs trusts. He represents clients primarily in the states of Rhode Island, Connecticut and the Commonwealth of Massachusetts. He was certified as an Elder Law Attorney (CELA) by the National Elder Law Foundation (NELF) in 2008. Attorney Connelly is licensed to practice before the Rhode Island, Massachusetts, Connecticut, and Federal Bars.