Pension Reform in Rhode Island

January 28, 2014

Rhode Island's pension reform bill is estimated to save the state $4 billion over the next 25 years, says Anthony Randazzo, director of economic research at the Reason Foundation.

Rhode Island has struggled to fund its pension system sufficiently for years. Twenty years ago, the value of the State Employees' pension fund was only 72 percent of its expected liabilities, and that number only got worse: in 2011, the pension fund did not even have 50 percent funding, with $6.8 billion in unfunded liabilities.

As a result, the state passed a pension reform bill in 2011. The bill:

  • Suspended cost-of-living adjustments (COLA) for retirees: COLAs are suspended until pension funding reaches 80 percent. After that, the adjustments will only apply to the first $25,000 of a person's yearly pension.
  • Increased the retirement age: Rhode Island's retirement age for pensions is now aligned with Social Security's requirements.
  • Introduced a hybrid defined-benefit/defined-contribution funding system: Because unions insisted on a defined-benefit system, the state created a hybrid plan. Workers will receive a defined-benefit from one fund. However, the defined-contribution system requires a contribution by employees of 5 percent of their base pay. Employees can choose from a number of mutual funds in which to invest, and the asset growth of that fund will ultimately determine the person's total pension amount.
  • Changed the amortization rate of liabilities: By increasing the amortization rate from 19 years to 25 years, the bill lessened the pressure on unfunded liabilities.
  • Created a plan so that local governments could make similar reforms to their pension programs: The bill set deadlines for cities with poor funding ratios (60 percent or less) to enact reforms, and a local pension commission was created to assess ways to make municipal pension funding solvent.

The effect of the new system on individual retirees will vary, but a worker with an average salary of $65,000 will likely receive an annual benefit of $40,824, or $7,000 less than he would have received prior to reform.

It is still unclear whether the reform bill will actually produce the estimated savings, as the hybrid plan structure might neutralize any cost savings due to the COLA suspension. Moreover, local government pension liabilities still pose a threat to the state's fiscal health.

Nonetheless, the state's efforts are significant, and other states should look to Rhode Island in fixing their own pension systems.

Source: Anthony Randazzo, "Pension Reform Case Study: Rhode Island," Reason Foundation, January 2014.

 

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