Robert Johnson

The changes made by the “Rhode Island Retirement Security Act of 2011” are unjust for many reasons. Chief among them is that many workers like myself took lower pay for future promised benefits that are now greatly diminished. Pay scales, however, have not been adjusted to reflect this new reality. This is especially true for workers with advanced degrees or professional certifications. It has now become increasingly difficult for state agencies to now attract these types of professionals. These points have been made by many. Less known is that the pension changes were not primarily undertaken to make the plan actuarial healthier or more sustainable in the long term, but instead to fundamentally change the structure of public employee pensions. Rhode Island, it was hoped, would be the first of many to have their benefits wiped away. This is evidenced by the large amount of outside money (including from former employees of Enron, of all places) and influence that was used to sway public opinion. Left unanswered is why these groups suddenly had concern over Rhode Island’s pension system when other pension systems throughout the country had far greater “unfunded” liabilities both in terms of their unfunded ratios and in the absolute amount of their unfunded liability.

If the sole purpose of the pension changes was to lower the liability, other options that were less draconian to the individual employee were apparently not entertained for all workers. That is because the main goal, again, was not to return the plan to a more healthy status, but to change how public employee retirement plans are structured. Rhode Island was an unwitting participant in a scheme that was orchestrated by deep-pocketed individuals, many with no connection to the State.

I am certain that if given the option to raise their contribution rates and retain most of their benefits, current workers would have selected overwhelmingly to increase their contributions and/or extend their retirement date a few years. Instead, older employees like myself are now left with both a small pension and a small amount of money accumulated in their 401A account. As someone who had these changes forced upon me in their forties, the time needed for the 401A account to amount to anything of significance had long passed. As any good financial professional would agree, the compounding effect of time is the greatest influence in one’s retirement portfolio return. Workers past a certain age (not just years of service) should never have been forced to rely upon a 401A plan. In fact, I would be happy to swap my 401A balance, increase my contribution, and extend my original retirement date for a return of my promised benefits.

So how did a state that treats pension benefits as contractual in nature make changes that are generally prohibited under the Contracts Clause of the U.S. Constitution? How was legislation passed that substantially impaired that contract? It was done by exploiting the then economic downturn and selectively misrepresenting data. The assumed rate of return was lowered, not just out of concern for future investment returns but more, I’d argue, to increase the size of the unfunded liability and increase the sense of urgency. Prognostications of selective, so-called experts were exploited to claim that the era of stock market growth had passed and the assumed rate of return was thus lowered from 8.25% to 7%. This ballooned the unfunded liability, creating an exaggerated sense of doom. As we can see by the actual returns of many stock indices since that time, these “experts” were wrong. The S&P 500 index has returned a historic annualized average return of around 10.13% since its 1957 inception through the end of 2022. From 2013 to mid-2023, the S&P 500’s average return has been 12.39%. While it is understood that the pension’s portfolio mix is different, and much more conservative than the S&P 500, the pension plan’s latest 5 year return was still 8.1%. The ten year return was 8.0%.

Another ploy was the improper practice of highlighting the employer contribution as a percentage of payroll data. These figures were misrepresented in the media as similar to the match a private employer might make to a 401k plan. However, the numbers are not comparable. The pension system’s employer contribution percentage is simply a budgeting tool and does not reflect the actual cost of current employee pensions. The employer contribution percentage is calculated using the actuarial cost of both the current and retired employees and dividing the amount by the payroll of just active employees. Since the number of active state employees has significantly decreased over the years, this number is exaggerated and under no conditions should be used as a reflection of the cost of current employees’ pension. A better figure is the pension system’s normal cost. Normal cost is the contribution necessary, when added to investment income, to pay for benefits earned each year. The latest employer normal cost rate was only 3.56% of payroll. It was 1.65% in 2008.

It was also claimed that employees could rely on a 3-legged stool in their retirement. What wasn’t said is that for many of us older workers, the legs would be short and wobbly. A small pension, a small 401a, while the 3rd leg, envisioned to be social security, has come under increasing calls to be cut and accordingly cannot be relied upon.

The changes made to the pension benefits are in hindsight too draconian. They were made under the guise of over-hyped fiscal distress to wipe away the normal contractual rights afforded to pension benefits that would otherwise be unconstitutional. The financial markets, as they always have, returned to their long-term averages. Meanwhile, a small number of employees have been left to bear the burden of changes that were clearly not the least-drastic of the options available to keep the pension system healthy and viable. Inter-generational equity requires that the burden of financing the pension system and the benefits paid out are spread fairly across successive generations. This is clearly not what happened here.

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