Rhode Island’s pension cuts are not only bad for its employees and the state, they promote the false notion that providing retirement benefits through...

Rhode Island’s pension cuts are not only bad for its employees and the state, they promote the false notion that providing retirement benefits through defined contribution plans is a sensible or viable option for pension drastically reducing the size of the pdf facing shortfalls. However, in the past decade, historically low market returns, along with many governments’ failure to keep up with required contributions, have caused many state and local pension plans to be underfunded.

Rhode Island’s pension fund was no exception to this trend. It faced an additional problem in that Rhode Island had been slower than most states to move to an advance-funded pension system, and faced a shortfall even before the 2008 market crash. This issue brief begins by comparing RIRSA with the pension plan it replaced. It then analyzes RIRSA’s impacts on Rhode Island state employees, as well as on the state’s finances. The shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost.

2011 are due to its higher retirement age and lowering or suspending the cost-of-living adjustment. The new DC plan doesn’t save the state money, but will cost retirees. RIRSA will result in an average benefit cut of 14 percent for future full-career employees. Furthermore, due to the market risk introduced by the DC plan, many future employees will likely do even worse than this average: For the quarter of future employees who are in the lowest quartile of investment returns on their DC plan, the cuts will be 22 percent or higher. DC plan are not projected to translate into savings for the state, and will do little, if anything, to improve the health of Rhode Island’s pension funds.

The changes will actually increase the average annual cost for taxpayers. Rhode Island can and should make its pension funds solvent without exposing future retirees to the risks and higher costs of DC plans. Rhode Island’s retirement system prior to the 2011 RIRSA reforms was not particularly generous. Consequently, RIRSA’s provisions—including suspending COLA payments, raising the normal retirement age, and introducing additional risk into employees’ retirement via a supplemental defined contribution plan—erode already-lackluster benefits.

Rhode Island public employees enjoyed a standard defined benefit pension, where benefits at retirement were based on years of service and final average salary, providing a predictable, constant stream of income in retirement. The normal retirement age was 65 after 10 years of service and 62 after 29 years of service. Based on a replacement rate of 55. ERSRI system was, on average, 11. 75 percent and state and local governments together paid 2.

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300 million in 2010 in total to the teachers’ and state employees’ pension funds, which is equal to 19. 5 percent of employees’ total salaries that year. Taken together, these findings suggest that the shortfall in Rhode Island’s pension plan for public employees is largely due not to overly generous benefits, but to the failure of state and local government employers to pay their required share of pensions’ cost. 25,000 of an employee’s pension. While this is the most immediate cut, in what follows we will focus more on the other cuts introduced by RIRSA.

This increase in the normal retirement age constitutes a significant benefit cut on its own. Finally, RIRSA changes the accrual rate under the current DB plan while also instituting a new DC plan for state employees. Under RIRSA, state employees receive a pension of 1 percent of final average salary per year of service. After factoring in the increased retirement age, this leaves lifetime DB benefits at just around half what employees would have received under Schedule B. 33,500 per year, and would receive these benefits for four fewer years. While employees’ total contribution rates remain the same under RIRSA, more than half of their total contribution—5 percent of salary—will be mandatorily deposited into a newly created defined contribution account, administered by TIAA-CREF, in which all state employees are automatically enrolled. The state will also contribute 1 percent of salary into these accounts.

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