April 26, 2011

Move Out of the State? That Might Only Buy You Some Time

Marc Comtois

Former RI Auditor General Ernest Almonte says moving out of the state is, right now, about the only way that Rhode Islanders can avoid paying the $13,000 apiece we "owe" to fund public employee retirees (present and future). This is the big headline that came out of a conference held at URI last night.

Also discussed was the Pew Center for the States research (RI fact sheet in this PDF), which found that Rhode Island had only 59% of its $11.5 billion pension liability covered in 2009, ahead of only five states (Illinois, 51%; Kentucky, 58%; New Hampshire, 58%; Oklahoma, 57%,West Virginia, 56%). However, as General Treasurer Gina Raimondo pointed out, Rhode Island is now even worse off (probably because of the recent decision to re-set the pension rate of return) and now sits at 48%. Worst in the nation. Yay.

Raimondo was on with Dan Yorke earlier in the day and left little doubt that we are screwed and that there is no more road left to kick the can down. She sounds ready to dig in and fix things. She said it wasn't "a problem" but "THE problem" facing the state right now. Unfortunately, Raimondo still seems to be clinging to the idea that a defined benefit plan--rather than moving to 401(k) style defined contribution plans--is still a viable option. I don't think so.

As Michael Barone recently wrote, "the U.S., in general, just can't afford generous defined benefit systems" anymore. Meanwhile, European countries are coming to the conclusion that social welfare benefits and programs aren't untouchable, after all.

The paradigm is shifting whether we like it or not. Promises were broken and it sucks. But it's economic reality: there is no money. We have to deal with current pensions and benefits, not just "future" pensions and benefits for workers not yet hired. That was the easy, low-hanging fruit. It's time for politicians--the people who are supposed to lead--to step up and really deal with this. That's why they were elected. If they don't, we'll have to find someone who will.

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Put em all on SS and a 3% 401k match and that's IT baby.
Everyone works till 62-cops and crybaby firemen too.
There's all the "study" you need in 2 very short paragraph's.

Posted by: Tommy Cranston at April 26, 2011 9:41 AM

Those are actually short sentences.

I started with The Providence Fire Department twenty years ago. The city was broke, then. The pension system was broke, then. People talked about "the big fix," then. Nothing was done, then.

Now it is now, and nothing will be done now. Had somebody told me twenty years ago the pension system was dead in the water for new hires, I would have cared less and planned accordingly.

Everybody wants instant gratification. My suggestion is to start now, with small improvements, and make more improvements as time progresses. Twenty years flew by, the next twenty will fly as well. If we stopped trying for the grand slam and started with some strategy the new system will emerge as time progresses.

Or, we can pontificate and watch the years and money disappear.

Posted by: michael at April 26, 2011 10:29 AM

Rip this one apart.

Instead of using the last three or five years of earnings to calculate the pension benefit, take the average of the entire career earnings (I’m sure the data is available at the retirement office), adjusted for inflation using an industry accepted and published adjustment factor. Only base pay is to count, not longevity or overtime as this artificially distorts the benefit. What this will do is to protect the folks who remained among the rank-and-file while reducing the outrageous benefits paid to those who were the beneficiaries of the “one contract and out” process. In other words, it will protect those who actually “earned it.” This method will also significantly reduce the benefit of those who took advantage of their years in part-time service to the state and/or local governments, waiting for their big payday once they got their full-time government job at the end of their career.

Then, reduce the payout percentage by at least 10% to 20% after adjustment to the new adjusted average wage measurement (or some significant but reasonable level that achieves the savings goal) and make if exempt from Rhode Island taxation, such that the savings will more than offset the lost state income tax revenue. By this act, you will remove the strong impetus to move to Florida or other states without a personal income tax. Finally, the COLA cap could then be lowered to match Massachusetts as they do not tax their state managed pensions and comparability would be assured.

Posted by: John at April 26, 2011 11:17 AM

With regard to the retirement age... I understand that the job takes a lot out of you, but wouldn't it be smart to put the young guys on the trucks, then once things started catching up to you, transition to desk jobs, dispatch, equipment upkeep, and prevention (school visits, compliance checks, etc.)?

It just seems silly to me to have 'careers' that only last twenty years, when the valuable experience could be of continued use and your retirement contributions would have some time to accrue monster value.

Posted by: mangeek at April 26, 2011 1:34 PM

I'll probably die wearing my boots. And I hope that's the case. At close to ninety years old. I started my retirement plan over 10 years ago. Guess what? Had I stuck the money in the mattress I'd have had more money than the return on investments. And that's not even counting the inflation loss. My fault? Heeding the advice of a "financial advisor" and believing that completely bogus 8% return projection. So I withdrew the entire thing that was worth less than one half of one year's wages (after 13 years of service with the same company) and started a small business. Paid the penalties and am growing something from seed. Oh, I didn't quit my day job, but I'm counting on myself later in life. If you want something done right........

Posted by: swamper at April 26, 2011 7:37 PM

"So I withdrew the entire thing that was worth less than one half of one year's wages (after 13 years of service with the same company)"

I've done a bunch of math on retirement, and found that the 'rule of thumb' for enjoying retirement requires contributing about 12% of gross pay for your whole working life. Obviously, employer contributions should even lessen the blow. Historically inflation is under 4% and the stock market yields about 8%... Lesser investments like real estate and bonds yield so close to the rate of inflation (historically) that they're more of a 'piggy bank' than an investment vehicle.

I'd like to see the tax code fixed so companies that fund 401k contributions of their employees 1:1 up to 10% of earnings (ten percent from you, ten from your employer) get bumped to a really low, highly competitive corporate income tax rate.

Posted by: mangeek at April 27, 2011 9:57 AM

Yes and my bad was working self employed and not contributing anything until the late age of 33 years old and it was only 9% gross, so i really missed the starting gun and under contributed. But the whole "rule of 72" where return on investment plus principal doubles your money never materialized for me and many others in the first decade of investing. It's my understanding that at 8% return, one doubles his money after 9 years. 8 times 9 equals 72. At 6% it would take 12 years. By eliminating the first doubling reduces the overall value of the retirement plan at retirement by exactly half. Call it the lost decade. But I realize I created this hole myself, so now I'll have to fill it back in later in life by dying first, then retiring.

Posted by: swamper at April 27, 2011 8:53 PM
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