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If you're a government worker, you have to pay a certain amount into the state pension system. If you're a Massachusetts taxpayer, you help fund that pension system with your taxes. Then all that money gets invested and ultimately paid out to government retirees.
But the state pension fund is projected to earn 8 percent on its investments — a pretty rosy scenario in this economy.
And the nonpartisan research group The Pioneer Institute is concerned about taxpayers having to make up more of the difference when those investments likely come up short.
Jim Stergios, the institute's executive director, spoke with WBUR All Things Considered host Sacha Pfeiffer Wednesday about its new study on the pension problem.
Jim Stergios: If you take a look at investment performance, if investment performance is high, the state number in terms of what it has to put in every year from its budget can go down. If that investment return is low, the state has to pay more or public employees have to pay more, and that's really hard politically. Ultimately, this is a question about how much we will have to pay into pensions and how much that will affect other core government programs.
Sacha Pfeiffer: So, as you've said, a lot of this depends on how much return these pension investments get. How much do the state's various pension boards expect their investments to earn?
Currently, the investment board is suggesting that we should move from where we are, which is about 8 percent, and the pension administration commission is suggesting we go down to 7 to 7.75 percent.
Even if we go down to 7 or 7.5, anyone who's looked at their savings account or their money market account or even their brokerage account probably thinks 7 sounds fantastic. So how realistic is 7 or 8 percent?
I think it's probably not very realistic. I think we've for a long time built in unreasonable assumptions about what our returns may be. The fact is, private sector firms that have 401(k)s and the like, they are assuming between 4 and 5 percent returns. This is a political question as well as a question about reasonable assumptions. It's really hard to push down that number.
So it sounds like you're saying the state is acknowledging it has an arithmetic problem but it's either ignoring the problem or it's kicking the can down the road.
It's kicking the can down the road. Look, I am very appreciative of recent efforts to undertake some reforms, like we've raised the retirement age for most every public employee to 60. That's progress and that's reasonable. But the fact is, even with those changes, we've tended to just want to kick the can down the road by doing things like saying, 'We're not going to pay it off by the date that we had promised; we'll pay it off 20 years later." So we have to actually get serious about this because for a long time we've treated investment performance, which was relatively high in recent years, as sort of a proxy for free money. We didn't have to make hard political choices. Those days are over.
Your organization has a new report out suggesting what you think the realistic rate of return should be. What do you think that number is?
I think in the short term we have to definitely move down to 7.5 percent. That is a first step. And I think if we stay there for a year or two, we take a look at what investments are looking like and, if we have to, we take a further step. But we think that moving it down to 7.5 percent now puts pressure on legislators to take this issue seriously and start creating some solutions.
This program aired on October 24, 2012.
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