Refinancing the Mortgage

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Monday’s Pension Reform Commission had a couple of recommendations that deserve follow-up and discussion. They appear headed to a full commission recommendation of extending the funding schedule by another 10 years and to allow any future expansion of liabilities to be amortized over 20 years.

To put it in perspective, Massachusetts figured out in the late ’80s that a pay-as-you-go pension system was not sustainable and started to sock money away in pension funds. Of course, a huge liability had been accrued that couldn’t be paid all at once. So, it was decided that we would pay that liability off over 40 years, culminating in fully funded pension plans in the 2020s.

However, for a variety of reasons — expanded benefits, poor investment returns, changes in assumptions — that goal looks very difficult to meet. Pushing the funding schedule out another 10 years has the appeal of lowering the current costs for cities and towns.

But it will have the effect of burdening future generations with additional costs. And it will have the effect of giving current legislators some breathing room to increase pension benefits (thereby accruing immediate political capital from the beneficiaries) while burdening future taxpayers with the costs (and they aren’t voting in the upcoming election).

Just as troubling is the proposal to allow new benefits to be amortized over a twenty year period. This has the same effect of providing immediate political benefit without facing the fiscal consequences in the future.

If you doubt the potential for mischief, I’d urge you to come to a Commission meeting. The chair, Alicia Munnell, bracketed the most recent meeting with an insistence that their recommendations be cost-neutral. The response was lukewarm, at best. And I’d hazard a guess that most citizens expect savings from this commission, not cost-neutrality.