A gubernatorial commission recommended a series of steps for Connecticut to cover its future pension and retiree health obligations, with the gap under the state”™s current budget currently pegged at a whopping $34 billion and as the former CEO of Pitney Bowes Inc. proposed an innovative pension solution for the private sector.
“The only option that cannot be considered is doing nothing,” said Gov. M. Jodi Rell, in a prepared statement issued as she readies for her final weeks in office. “The trends are stark: The annual costs related to our pension and retirement plans were about 5.6 percent of the state budget in fiscal 1992. Today, they are estimated at about 11.2 percent of the budget ”“ and if the trend is permitted to continue, they will be almost 19 percent of the budget by 2032. Meaningful action is essential if we are to keep our promises to employees who have already retired and those who serve the state now.”
The panel”™s short-term recommendations included ensuring that the state always makes its annual required contribution ”“ the amount that must be paid into the account to cover current costs and to earn sufficient interest to pay estimated future costs ”“ and increasing the amount that state employees contribute toward the plans.
In addition, the panel recommended increasing the retirement age for state employees or adding incentives for later retirement; and taking steps to control the annual increases in health insurance costs.
Over the long-term, the panel proposed setting performance benchmarks ”“ for example, achieving a funding ratio of 55 percent by 2018 ”“ and requiring that all future actions, such as retirement incentive programs, be subject to a full analysis of their long-term impact on the plan before they are approved.
Teacher retirement under scrutiny
Separately, legislators disclosed they are investigating whether the Connecticut General Assembly has the power to make benefit changes to the Teachers”™ Retirement System (TRS) pension. John Moran, an analyst in the Connecticut Office of Legislative Research, noted that the state stiffened the law in 2003, but that under statute the legislature can change pension benefits for teachers”™ whose pensions are not yet vested. Teachers currently must work 10 years before those benefits vest. Windham County Rep. Shawn Johnston led the charge to preserve benefits.
“We”™ve made a deal,” Johnston said at the time of the debate in 2003. “That teacher taught knowing what the rules were. That teacher had a right to that benefit and ”¦ we can”™t retroactively go back and change that benefit.”
Under the agreement Rell negotiated with the State Employee Bargaining Agent Coalition (SEBAC) in 2009, Rell said two additional provisions are helping to reduce the unfunded liability. The first ”“ the “Rule of 75” ”“ concerns entitlement to health benefits for state employees who leave state service with vested pension rights but do not immediately begin collecting a pension.
Until the rule took effect, former state employees qualified for retiree health benefits when they reached retirement age with at least 10 years of state service. Under the “Rule of 75,” the combination of a retiree”™s age and years of service must equal or exceed 75 before he or she can begin receiving health benefits, even if the former employee qualified for a pension at an earlier date. This reduces the state”™s overall health benefits obligation, which is the largest portion of the state”™s unfunded liability.
In addition, under the SEBAC agreement, current employees with less than 5 years of service and all new employees must contribute 3 percent of their earnings to help pay for retiree health benefits. Previously, there was no contribution from active employees to fund retirees”™ health plans. This establishes a new revenue stream to help further support the retiree health care fund.
Pitney Bowes CEO has a plan
In September, former Pitney Bowes Inc. CEO Michael Critelli outlined steps he believes would solve the pension problem in the private sector ”“ while acknowledging his solution could be difficult to impose on workers. Noting the current options available to employers ”“ reducing payouts or forcing workers to put in more time to collect pensions ”“ Critelli said the common element is that they require employees or retirees to give something up, leading to resistance from workers and unions. And often, he adds, “retirees” get new jobs even as they draw pensions from their old ones ”“ an inefficient reality given the continuing expertise they could be providing their old employer.
The solution as Critelli sees it would require the tax law to be changed to allow a retirement-age employee to keep working at his or her current job, although at a reduced pay rate, but get enough of a pension benefit to take home more money in the current year.
As an example, Critelli cites the hypothetical case of someone making $100,000 a year with a pension equal to 75 percent of his or her pay, and a full-pension retirement date at age 55. Without adjusting for pay increases or cost-of-living adjustments, that employer would be responsible for $1.7 million over 27 years if the employee were to live to age 82.
Under Critelli”™s vision, employers could instead pay $30,000 a year for the employee from the pension and $75,000 in base pay. Under that scenario, he said, the employee would get 5 percent more in overall compensation; if the employee elected to work another 10 years, that decade would cost the employer $300,000 instead of $750,000, and then could take an immediate reduction in its pension costs.
“Historically, companies wanted older workers to retire so that they could replace them with younger workers,” Critelli stated. “The reduced pension cost of keeping an older worker was more than offset by the reduced cost of replacing the older worker with a younger work. However, in my proposed solution, the employer can effectively replace a $100,000 worker in place with a $75,000 worker, without losing that older worker”™s skills and experience.
“In many cases, the older workers were not as productive as those who replaced them,” he added. “Today, there is ample data to show that older workers are more productive, more loyal, and do higher quality work than those who replace them. Moreover, in many industries, it is extremely difficult to replace older workers, because there are fewer younger people with the same skills.”
