Since Bruce Poliquin became the State Treasurer, there has been a lot of discussion about Maine’s pension liabilities and whether or not Maine is facing a crisis. Because of the Treasurer’s nonstop barrage of media, I’d like to take the opportunity to shed some light on a complex issue.
The Maine pension system was set up to provide retirement benefits for state public employees, including teachers. The employees pay into the system, receive a match from their employer (the State), and collect after they retire. Almost all of these employees are ineligible for Social Security, and do not have 401(k)s; the money they receive from their pension often represents the sum total of their retirement funds.
Here’s the problem: when the system was created it began paying benefits out to retiring employees immediately, even if they hadn’t paid into the system to fund it. This created a funding gap, because current employees were always paying for current retirees rather than putting money away for their own retirement. This problem was made worse over the years as the governors and legislators avoided fully funding the retirement system in order to plug budget gaps. By the early 1990s the system was in a full-blown crisis, with only about 40% of the money needed to pay out future benefits on hand.
Fortunately during the 1990s Democrats and Republicans came together and worked out a plan to fix this pension gap, otherwise known as the Unfunded Actuarial Liability (UAL). By 2008 Maine’s UAL was 80% funded, was on track to be completely paid off by 2028, and was rated as one of the strongest pension systems in the US. Then the recession hit; because of losses in the stock market the State’s funding of the UAL fell to around 70%.
Fast forward to 2011. The average state employee receives $18,500 a year in retirement, well below what most private sector employees receive in Social Security and other retirement benefits. The supposed crisis comes from the understanding that the pension system is only 70% funded, meaning of the total obligation we have, only 70% of those funds are on hand. (Moody’s ranks us 29th out of 50 states.)
We are constitutionally obligated to balance the fund by 2028, and are well on our way to meeting this goal. The new administration in Augusta wants to increase employee contributions to the retirement system while decreasing the State’s benefits. Under his proposal teachers and state employees will contribute 2% more to the pension fund while the state will contribute 2% less.
In addition, the budget raises the retirement age from 62 to 65 for those state workers who haven’t had five years of service. Finally, the budget freezes the cost of living for the next three years (which produces most of the savings).
