Explaining Why the Pension System Should Not Be Reamortized
To rigorously show that reamortizing a pension system costs almost all taxpayers more money, you would begin with the risk-free rate of return on money and the expected return from the pension fund (which are two separate quantities) and then apply an appropriate discounting formula to the appropriate combination of the two. However, going strictly by the percentages overlooks an important point, related to a famous quote from economist John Maynard Keynes…
The long run is a misleading guide to current affairs. In the long run we are all dead.In deciding whether to reamortize a pension system, we must take into consideration both the fact that our lives have finite end dates and as well as finite start dates, i.e. taxpayers do not exist from the beginning of time.
If a pension system is properly designed, funded and not raided, the state maintenance contribution — the part that goes to the fund from taxpayers without passing through an employee paycheck first — should only be at most 2-3% of payroll. In many years, it should be around 1%, and it never should reach the 20-25% that Rhode Island taxpayers will be paying through the year 2029 on the current funding schedule. The good news is that after 2029, if Rhode Island doesn’t reamortize (and benefit levels are rationally aligned with contributions and realistic estimates of interest growth), the taxpayer contribution should be in the range of 1%-2%-3% of payroll going forward from then on.
However, if the system is reamortized under a new 30-year plan (and benefit levels are not adjusted), the state contribution will remain a double-digit percentage of payroll through the decade of the 2030s. The result will be that RI citizens in the 2030s, some collecting the first paychecks of their lifetimes in that decade, will be burdened by higher tax rates than or service levels from what they would experience under a non-reamortized system. These citizens — amongst whom will be many individuals yet to be born — will be left with fewer resources for addressing their own needs, because we will have decided to make them help pay for what at that time will be decades-old mistakes made by our generation and the generations prior.
To progressives like gubernatorial candidate Patrick Lynch, passing the problems we’ve created to people 20 years down the road is the “fair” way to deal with the situation. The lesson, as always, is that progressives and public finance don’t mix.