Changes to Retirement System - a Solution in Search of a Problem

Due to a new law that changes the state retirement systems, nest eggs will shrink for many teachers, child protection caseworkers, parole counselors and others who deliver vital services for modest pay. This is despite the fact that their pensions are adequately funded and sustainable. The changes will also require all public-service workers and the state to shoulder higher costs unnecessarily.

In what is clearly a solution in search of a problem, the new law makes two significant changes for public employees hired during or after May 2013:

• Stiffer early retirement penalties –   Those who retire before age 65 will see their benefits reduced by 5 percent for each year they are short of the official retirement age. So a teacher with 30 years of service who retires at age 60 will have his or her monthly retirement allowance permanently reduced by 25 percent. The penalty was previously 3 percent.

• Higher contribution rates – When estimating future pension liabilities and contributions, the state will start assuming  its pension fund investments will earn less money than they have in the past. This will mean that both the state and public employees will have to contribute more money to retirement in a given year  to ensure that  pension funding targets  are met.  

Over the last 20 years the state pension trust fund has averaged annual returns of approximately 8.7 percent and has used a more modest  8 percent rate to estimate future liabilities and contribution needs. The new law  gradually reduces  the investment return assumption  to 7.7 percent  by 2017.  That may not sound like a big change, but it will mean that currently employees will pay more today in higher contributions, yet receive a smaller future pension. 

While touted as necessary  to ensure the long-term health  of our public retirement system, these changes ignore the fact that Washington has  some of the most well-funded and well-run pension plans in the country.

By the state actuary’s estimates, Washington’s retirement system is already securely funded,  with $1.02 in assets  on hand to pay for every dollar of pension benefits employees have currently earned. According to the Pew Center on the States, only two states, New York and Wisconsin, boast higher funding ratios.

These pension changes will have real impacts for Washington families, asking long-time dedicated public employees to pay more into an already well-funded pension system while at the same time reducing the value of future retirement.