W. David Shallcross

A BRIEF HISTORY OF THE SOCIAL SECURITY SYSTEM AND ITS RELATIONSHIP TO THE ERSRI PENSION SYSTEM

The Stock Market crashed on October 24, 1929. Within 3 months the Stock Market had lost 40% of its value , unemployment exceeded 25%, 10,000 banks failed, and the Gross National Product had decreased by $50 Billion dollars, from $105 Billion to $55 Billion dollars. Wages had decreased by 40%. This was the start to what we now know to be the Great Depression. Needless to say, the Great Depression placed enormous strain on our government and far too many citizens became totally dependent on the government for their most basic and fundamental needs.

Social Security was established by Franklin Delano Roosevelt and the Congress on August 14, 1935. The cost of the program was absorbed jointly and equitably by approximately 90% of the workers and their employers. Things have changed since 1935, but the fundamental pieces of the plan still exist today. Employees contribute to the Social Security fund directly from their wages and employers match that contribution by an equal amount.

The initial Social Security plan did not contain a COLA. Note, particularly, that is what Social Security Administration calls the inflation protection adjustment it made, effective in 1975, and a few years later made it an Automatic COLA based on the Consumer Price Index (CPI). From that point forward, every year, Social Security pensions are adjusted, almost always increased, by the percentage increase of the CPI. Social Security recipients receive a raise over the previous year based on the CPI.

Social Security is payment in advance to the fund while people are working, for a guaranteed benefit once they qualify to begin receiving monthly retirement payments. Currently the contribution is 6.2% of gross earnings and another 1.45% toward future Medicare coverage. Employers contribute 6.2% + 1.45% to the fund as well.

The Annual Required Contribution (ARC) for the employer is exactly the same as that required contribution by the employee.

Because these contributions are percentage based, the more the employee is paid in salary, the more money he or she contributes to the fund. Likewise, this also applies for the employer. It is designed to be an equal requirement for both. And, the more an employee contributes to the fund, the more he or she receives upon retirement.

When FDR and the Congress established the Social Security fund it was intended to provide a stabilized pension for the elderly population. It was intended to keep a significant population, the more elderly, safe from not having an income to provide for their fundamental daily needs without depending on government welfare. In a sense, it was like an insurance policy where contributions were made while one could afford to make the payments and is protected later in life when their earning potential is in decline. And it lessened the need for families to provide financial support for their parents and grandparents, thus giving families more control over their family resources.

There have been changes from time to time over the historical record of Social Security. FDR acknowledged, in 1935, that the plan was not perfect, but the most basic principles have remained for nearly 90 years now and Social Security has met those expectations it was designed to address. As much as the employee has a responsibility to the employer, the employer also has a responsibility to the retiree. A basic acknowledgement is that employers need employees to succeed and employees need employers for exactly the same reason.

Fundamental to this historical brief, is the fact that FDR provided the start up funds to make it possible. It was an investment in the long term health, wealth and safety of our citizens. But he also provided significant funding for every state to build a smaller model of Social Security at the state level, and that gave rise to state and local government pension plans now in existence today. These plans were intended to be mirror images of the federal Social Security plan but for a lesser population of government workers.

When we consider government workers and their pensions, we must recognize that the employee is a ycitizen-taxpayer and we must also recognize that the government workers are employed to provide a wide variety of services that would otherwise be financially prohibitive, if not impossible, for an individual taxpayer to afford. We must also recognize that the employees are, themselves, citizen-taxpayers. They have the same needs and responsibilities as every other member of the society, and are entitled to be paid a fair wage with whatever benefits that non-government employees normally receive for their services. Basically, government employees are no different than non-government employees except that their paychecks come from a different source, the taxpayers. Government employees are also taxpayers, earning their wages through service to the public good.

STOP!

CONSIDER FOR A MINUTE. 

WHAT WOULD AMERICAN SOCIETY LOOK LIKE IF IT DID NOT HAVE GOVERNMENT EMPLOYEES PROVIDING THESE ESSENTIAL SERVICES?

So we are on the same page and we acknowledge that the services that government workers provide are an essential part of everyday life in this country. Without them, we would not have enough hours in a day to do what we do in providing for our needs, families, and our society in general. Mostly we are beyond the eras of ‘bucket brigades’, ‘deputized posses’, and ‘one-room schoolhouses’.

Moving back a few paragraphs, many government workers contribute to Social Security, but a significant number do not. FDR made it possible and provided the funding to establish a state-based form of Social Security. The intent was so very obvious. The state was expected to provide the same security for its elderly service providers through a state-managed pension plan for government employees that Social Security provided for non-government employees.

In retrospect, those participating in the Social Security program, might have been excluded in the state-managed pension plan. But in Rhode Island, a law was enacted to require all government employees to participate in the state-managed plan. Thus the ERSRI Pension Plan was established just one year (1936) after the federal Social Security program was enacted. Same plan under different management. For decades, that served government employees and the taxpaying public well, as it was expected to do.

And then the wheels fell off the state-managed plan.

The assets of the plan were used by the state for a myriad of reasons, none of which were related to pensions and the secured retirements of employees. All of these reasons used assets provided by the ERSRI members whose contributions, including those of their employers, were diverted to other uses. Since 1990, and perhaps before that depending on one’s viewpoint, the state-managed plan has seen dozens upon dozens of adaptations trying to put the wheels back on the state-managed plan. None of them have been successful. Even the General Assembly was keen enough to realize that the plan was so seriously defective, it created a Constitutional Amendment that moved its members out of the ERSRI plan and onto a different and constitutionally enacted plan similar to the Social Security plan, with raises determined by a base rate and increased yearly based on the CPI data.

If it wasn’t for a federal law, ERISA, that excludes governmental agencies from being penalized for fiduciary malpractice, the State of Rhode Island would be facing untold consequences so significant as to render itself criminally liable for its mismanagement of its pension fund.

At this point, the reader might wonder why are we looking at the Social Security Program, with which most everyone is familiar, when the issue at hand, is the ERSRI Pension plan and the consequences that have followed as a result of the changes to it. The Social Security program and the ERSRI program are almost the same in age with the ERSRI intended to be modeled after the Social Security plan. As we look at the consequences below, we must ask ourselves, are these changes improvements to enhance the goals of the original intent envisioned by FDR and the Congress, or have they detracted from those goals?

As an example we can use a theoretical pension of $50,000 a year. No doubt there are higher and lower yearly pensions. This theoretical assumption is not intended to be an ‘average pension’ it just makes the calculations easier having all those zeros in the calculations.

A member of the ERSRI Pension Fund with a base pension of $50,000 in 2012, and with a typical Social Security annual distribution including the CPI-based COLA would now be receiving a $69,582 annually. That same person in the ERSRI Fund would still be receiving $50,000. Effectively, Social Security would have out-produced the ERSRI fund over the same period by $19,582.

No one gets rich on Social Security distributions but at least they keep up, mostly, with the cost of living, even if it is lagging a year behind the times.

In actuality, during the 2012 – 2023 time frame, the cost of living increased by 36% (rounded). Being in the ERSRI plan when compared to the Social Security plan, places the RI government employees at a 39.2% disadvantage when matched to the announced cost of living by the federal government. What we miss in the calculations is the fact that the cost of living is actually a year old when we do these calculations, but as an approximation, the evidence is so obvious, one cannot miss the failure if the ERSRI Pension Plan to meet the needs of the retirees it was founded to protect.

Things have to change, and they need to change immediately. There is no more time to study solutions. That time passed years ago. The most recent adaptations, encased in the 2011 Legislation and followed by the 2015 Legislation that adapted the adaptations from 2011, have failed miserably and have created untold inequities beyond mention in this basic Preface to some of the most critical and potentially illegal acts that the General Assembly has forced on its active and retired employees. How was the ERSRI “SAVED” by the legislation and at whose expense? After 12 years of frozen salaries, smaller pension bases and extended years of service, to mention just a few of the consequences, provided are some potential changes that must be considered in order to get the wheels back on the cart and the ERSRI Pension Plan safely in recovery.

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