AUGUSTA – The state’s 70-year-old pension system may soon be retired.
After dealing with decades of underfunding and the 2008 stock market crash, lawmakers are considering freezing enrollment in the $10 billion retirement system.
Current public employees and retirees wouldn’t be affected, but future employees could be shifted into the Social Security system and a smaller supplemental retirement plan.
Among the advantages of the new system, lawmakers say, is that workers who move between the public and private sectors would no longer be penalized through reduced Social Security benefits.
A report submitted last week to the Legislature describes one possible option for a new system, which could take effect as soon as June 2015. The Legislature’s Appropriations Committee is expected to discuss the report in the coming weeks, although a decision is not likely until next year.
Phasing out the pension system would be a big move for Maine, one of 14 states that have a public workers’ pension system totally separate from Social Security.
“It could be a big step,” said Sen. Dawn Hill, D-Cape Neddick, a member of the Appropriations Committee. “The new economic reality seems to dictate that we at least take a look.”
There are 27,800 retirees now enrolled in the state’s Public Employees Retirement System, according to a database of members obtained through a Freedom of Access Act request.
Those collecting pensions include retired teachers and school administrators, state employees, municipal workers, legislators and judges.
Individual pension benefits range from $20 a month for people who worked only briefly in the public sector to $9,607 a month, or $115,284 a year, according to the data. The retiree who earned the state’s top pension is Ulrich Jacobsohn, an 83-year-old forensic psychiatrist who was clinical director at the Augusta Mental Health Institute and director of the State Forensic Services.
The average state pension is about $19,693 a year for retired school and state employees, the largest category of retirees in the system.
Maine’s retirement plan for school employees and state workers is what’s called a defined-benefit plan. Payouts are based on years of service and salary, not how well the stock market does while the money is building up.
Public workers can expect a benefit equal to 2 percent of their highest average income, multiplied by the number of years worked.
So, for example, a 20-year employee who earned an average of $40,000 in his three highest paid years would get $1,333 a month, or $15,996 a year.
The benefits are paid for by a combination of worker contributions, state contributions and the investment income earned by the massive retirement fund.
Workers contribute 7.65 percent of their salaries. The state has historically kicked in 5.5 percent as its regular share, plus an additional amount to correct for past underfunding. That underfunding put the pension system in financial jeopardy in the 1990s, when Mainers passed a constitutional amendment to fully fund the system by 2028. The financial rebuilding plan was largely on track until the 2008 stock market crash reduced the pension fund’s assets again.
To get the rebuilding back on track, the Maine Legislature last year raised the retirement age from 62 to 65 and reduced future cost-of-living increases, among other changes. That effectively reduced the amount of employer contribution needed from the state to 2.9 percent of salaries, and reduced the amount needed to correct underfunding from 14.5 percent to 12 percent.
Appropriations Committee Chairman Sen. Richard Rosen, R-Bucksport, said it is a good time to consider a new start now that the existing pension system is stabilized.
Rosen said the change won’t save the state money, especially in the beginning. He likes the idea mostly because it will help Maine’s public workers, who change jobs and careers much more than they used to, he said.
Teachers and state employees who go to work in the private sector often find out later that they won’t get the Social Security benefits they expected because the federal system withholds a portion of those benefits from anyone who also has a state pension. The same penalties apply to private-sector workers who go into the public sector during their careers.
“When you look at today’s work force opportunities, that just seems like such an outdated model,” Rosen said. “To me, portability (of retirement benefits) is critical. It helps to break down this barrier between public and private sectors.”
Some lawmakers see other advantages in phasing out the pension system. Maine’s state budget would no longer be as exposed to stock market crashes that reduce the funds’ assets, said Sen. Roger Katz, R-Augusta, and an Appropriations Committee member.
“After every decline in the stock market, we end up with an unfunded liability problem,” he said.
The Maine State Employees Association worked with other employee unions and the Public Employees Retirement System on the report submitted to lawmakers last week. The report outlines a possible new retirement system as requested by the Legislature, although its authors don’t take a position on whether the move is a good idea.
The new system would require the state to pay 6.2 percent of salaries as its Social Security contribution, plus another 2 percent for its share of the supplemental retirement plan, according to the report. The supplemental plan would work something like a private retirement plan, but with a partial guarantee of future benefits.
Chris Quint, executive director of the MSEA, said there will be arguments on both sides.
On one hand, the Social Security penalties are a real problem for public retirees who spent part of their careers in the private sector, he said.
On the other, the 70-year-old pension system and its guaranteed benefits have historically helped public agencies hire and keep workers who could earn higher salaries if they worked in the private sector, he said.
“The current system is well-funded, it’s well-run and it is a good benefit for state workers and teachers,” he said. “They know what they’re going to get when they leave.”
States around the country are reassessing their retirement systems, and especially the cost of those systems, as they try to balance budgets in a struggling economy, said Sandy Matheson, executive director of the Public Employees Retirement System.
What Maine is considering is an exception, however.
“I’m not aware of any other state (with a separate pension plan) considering a move into Social Security,” she said.
Matheson isn’t taking a position on what Maine should do with the pension system, she said. She expects to present the report to lawmakers in person in the coming weeks.
MaineToday Media State House Writer John Richardson can be contacted at 620-7016 or at: