The treasurer’s call for a cut in the pension’s rate of return on its investment portfolio reflects his desire to look reality squarely in the face. While investment history from the mid-80s is higher than 8 percent, investments over the last decade have been well below that target, and the market continues to be plagued with uncertainty and real structural questions.
The treasurer’s call to reduce the expected rate of return is also prudent planning, because the years in which the state doesn’t meet the benchmark are usually the years in which we can least afford to kick additional money into the fund.
Rhode Island’s general treasurer Gina Raimondo, a Democrat, started out similarly, seeking a reduction from 8.25 to 7.5 percent. Looking reality in the face, she realized that she had to go further—with reforms that moved from defined-benefit plans to hybrid plans that included elements of defined-contribution plans and annuities. She also increased the retirement age and placed a moratorium on COLA increases until the state pension fund is closer to fully funded.
Massachusetts’ reforms to date have been helpful but frankly they are modest at best. Legislators should not think that they have done their work and walk away from this issue. Last year’s reforms may have cut some benefit levels for new state hires and increased contribution levels for others. But we also made matters a heck of a lot worse for future generations by extending the payment schedule for state pensions from 2025 to 2040. That’s billions in added costs.