PAC Publications: State Workers Report (printer friendly version)

How Workers Fare under the Massachusetts
State Retirement System

Ellen A. Bruce, J.D.
Gerontology Institute
University of Massachusetts Boston
August 1997

EXECUTIVE SUMMARY

The workforce has significantly changed since the Commonwealth of Massachusetts’s retirement system was instituted in 1946. Workers change jobs more often, more women are in the workforce, and people are retiring earlier and living longer. This study examines the benefits under the Commonwealth’s pension system and the implications for state employees of not being part of the Social Security system. It concentrates on comparing the benefits and contribution rates in the Commonwealth’s system to other public pension plans that combine a public plan with Social Security.

Three policy questions were examined: a) Are there structural elements of the Massachusetts system that result in inadequate pensions for its workers? b) How do the benefits compare to those of other states? and c) Would the Commonwealth’s retirees benefits be better in a system combined with Social Security?

THE STUDY

In order to answer the questions above, data from the Massachusetts State Retirement Board on active, terminated, and retired employees from 1991 through 1995 were examined to determine patterns of employment. The structures of Massachusetts’s public pension system and Social Security were also examined, both of these as a backdrop to the state comparison component of the study. Massachusetts is one of only seven states in which a majority of state employees do not participate in Social Security. It is typical for states to supplement Social Security with a public pension plan; therefore, three states with supplemental plans were chosen for the comparative study.

FINDINGS

The profile that emerged in the examination of Massachusetts statistics was of a state workforce which was slightly more female than male, was concentrated between the ages of 35 and 49, and in which individuals did not stay in the system for their full careers. As of December 31, 1995, there were 83,199 active employees under the state retirement system. (Teachers or employees of local government participating in other Massachusetts public systems were not included.) The following statistics were notable:

	•	53% of the state workforce was female as of December 31, 1995.

	•	Of workers employed as of December 31, 1995, only 44% of women were vested compared to 52% of men.

	•	Of workers (both terminated and retired) who left state employment between 1991 through 1995, 72% left prior to vesting.

	•	Only 11% of people retiring from 1991 through 1995 had 30 years or more of state service.

New Mexico, Rhode Island, and Tennessee were chosen for the comparative study because they provided a range of what was judged to be a high-benefit state (New Mexico), a medium-benefit state (Rhode Island), and a low-benefit state (Tennessee). All have public plans which supplement Social Security. Literature was obtained on the benefit formulas used by each state to be used for the calculations in this study.

Hypothetical state employees were developed who had work histories of 15, 30, and 40 years and salary levels of $20,000, $35,000, and $60,000. The purpose was to compare the actuarial value of the benefit they would have earned had they worked in Massachusetts with those of the comparison states. The analysis revealed the following:

	•	The Massachusetts state pension is worth more than Social Security at each of the salary levels studied. But since benefits in Social Security are weighted toward lower-income employees, the hypothetical higher-wage Massachusetts state workers did relatively better than the lower-wage workers when compared to a worker in the private sector with only Social Security.

	•	Individuals who have a split work history, between the private sector without a private pension and the Massachusetts public sector, have lower retirement benefits than individuals who work entirely in the Massachusetts system. The exception is those who worked for the state for less than 10 years.

	•	Individuals who work in the private sector without a pension for less than 10 years and for the Commonwealth for less than 10 years are left with neither Social Security in their own right nor a state pension.

	•	Each of the 24 hypothetical employees in Massachusetts had retiree benefits lower than their counterparts in each of the three states. The differential ranged from 101% to 239% of the Massachusetts benefit.

	•	Massachusetts has a lower contribution rate than each of the comparison states, ranging from 5% to over 10% depending on the date of hire. The combined state and Social Security contribution rate was 11.2% in Tennessee; 14.7% in Rhode Island; and 13.8% in New Mexico.

POLICY CONSIDERATIONS


	•	Massachusetts provides a good pension (80% of the worker's highest three-year average salary) for a single person who works his or her full career with the state. However, married workers must reduce their monthly benefit in order to provide a pension for their spouse after the worker’s death. If they don't, and the spouse has little or no work history of her or his own, the spouse would have no pension and no Social Security after the worker’s death.

	•	Massachusetts’s high vesting requirement of 10 years works against the employee’s economic security in retirement as does the policy of crediting part-time on a pro rata basis for vesting purposes (an individual can work up to 20 years part-time without any credit toward retirement). These requirements particularly affect women, who typically spend significant time outside the workforce to care for family members. The lower vesting rates of women as reflected in the State Retirement Board’s statistics may be attributed to the vesting requirements in Massachusetts.

	•	Participation in Social Security would benefit certain workers. Workers who work for the state for less than 10 years lose significant retirement benefits because they neither vest in the state system nor do they earn credit toward Social Security. Participating in Social Security would ensure some coverage for those years. Also, Social Security provides a spousal benefit and survivor benefit without a reduction in the worker’s benefit, so the spouse is guaranteed some protection. It also is weighted to benefit lower-wage workers unlike the state retirement plan.

These issues could be addressed without the state joining the Social Security system but, since the federal government is considering mandating Social Security participation for all new state and local employees, it seems wise to explore the cost and benefit implications for all employees. Finally, the state comparisons indicate that the level of benefits in Massachusetts should be examined.

RECOMMENDATIONS

Recommendation 1. A 10-year vesting requirement is too long for today’s work patterns. In addition, the crediting of service on a pro rata basis results in long-term, half-time employees not being vested until 20 years of service. Of all the workers in state government who left employment from 1991 through 1995, 72% did so before vesting. Women tended to vest at a lower rate than men. Of employees working in 1995, 44% of women were vested compared to 52% of men.

Lowering the vesting requirement to five years would increase coverage for workers who choose to leave their contributions in the system.

The Massachusetts Legislature should pass and the Governor sign legislation to lower the vesting requirement to five years and crediting 1,000 hours of employment in one year as one year of service.

Recommendation 2. Cost-of-living increases in pension benefits are important for maintaining the value of the pension. From 1989 through 1996, Massachusetts pensions were increased 11% while the Consumer Price Index in the Boston metropolitan area increased 35%. The longer a retiree lives, the more important the COLA becomes. As women’s life expectancy at age 65 is four years longer than men’s, COLAs can be crucial in helping to prevent poverty among the poorest group in the Massachusetts population — women over the age of 85 years.

The Massachusetts Legislature should consistently increase pension benefits as provided in the new legislation, and cities and towns should develop mechanisms to grant COLAs to their pensionaries.

Recommendation 3. Massachusetts is one of only seven states in which the majority of state workers do not participate in Social Security. Three concerns raise the issue of whether Massachusetts should participate in Social Security: first, the 1994-1996 Advisory Council on Social Security has recommended that all new public employees participate in Social Security; second, Massachusetts’s state retirement benefits, unlike Social Security, do not provide for an automatic spousal benefit; and third, workers who leave state employment prior to vesting earn nothing toward retirement.

The Massachusetts Legislature and the Governor should jointly establish a commission to study the cost and benefits to individuals and the state of participating in Social Security.

Recommendation 4. Massachusetts had the lowest benefits in the comparison of the pension benefits in the Massachusetts state retirement system to those in three states that participate in Social Security and were judged to be high-, medium-, and low-benefit states. Massachusetts also had the lowest contribution rates but the contribution rate in Massachusetts varied significantly from 5% to over 10%.

The Massachusetts Legislature and the Governor should jointly establish a commission to review the benefits under the state retirement system, looking specifically at contribution rates and the cost of creating a spousal benefit, subsidizing survivor benefits, and increasing low-wage workers’ benefits.