Pension Reform Deserves More Attention

Pension Reform Deserves More Attention

"Aligning the retirement options with what best serves the vast majority of public workers ensures the Montana’s government remains efficient. That’s a win-win for Montanans."

While historic tax relief, housing reform and constitutional amendments have received a lot of attention, no one seems to be talking about one of the most important proposals before the 2023 Montana legislative session: pension reform.

Public pensions are a boring, but important topic. It’s no secret that the cost and funding status of Montana’s public pension systems has been a perennial challenge facing policymakers in Helena. Along with the ever-rising costs of pension liabilities, public employers throughout the state face growing hiring challenges which has left key government departments understaffed and unable to serve the needs of the public efficiently. Thankfully, Montana’s unique and likely fleeting budget surplus at this moment has afforded legislators the opportunity to address these festering issues in a way that protects taxpayers and boosts employee recruitment.

To tackle the debt burden and make it easier for workers to come and go between the public and private sectors, the legislature is weighing a new approach in HB 226. This bill updates the way state and local governments fund the retirement benefits of their workers, as well as changes the default benefit to one that works for most new entrants into the Montana Public Employee Retirement System (PERS).

The PERS-Defined Benefit (PERS-DB) plan is the largest of the Montana’s public pension systems, with over $8 billion in liabilities. PERS also offers a PERS Defined Contribution (PERS-DC) plan, which over 5,000 members have proactively elected over the DB plan. PERS is currently facing two significant challenges: stagnant funding and uncompetitive benefits.

Unlike most states that fund their major public pension systems at a rate each year that is actuarially determined, Montana funds benefits according to a figure set in law, often leaving the fund short of contributions when they are most needed. HB226 puts in place a system that ensures retirement benefits earned by public workers don’t turn into avoidable and expensive debt.

HB226 also switches the default option from the PERS-DB benefit that caters to career public employees to the PERS-DC that allows workers to freely enter and leave public employment throughout their career without interrupting their retirement goals. Nearly a third of public employees move on to other jobs before they become vested in their PERS-DB benefit, and less than a fifth make it to earning even a partial benefit. For most new members of PERS, defaulting into the DB does little to advance their retirement goals. Switching the default to the existing DC plan will ensure the majority of new workers are getting the best benefit available. The PERS-DB benefit will remain unchanged and still be an option for the minority that plan to remain in public employment for 20 to 30 years.

Although most stakeholders have registered in favor of HB226, some have voiced concerns about defaulting future employees into PERS-DC. In a recent Senate hearing, the example was given of a new 22-year-old public employee defaulting into a “less secure retirement plan.” Based on the latest PERS actuarial assumptions, that new 22-year-old public employee has an 18% probability of working the required 10 years before earning a partial PERS-DB benefit and only a 9.5% probability of earning a full benefit. For 90% of new 22-year-old public employees, the PERS-DC is clearly the better option.

If HB 226 eventually makes it across the finish line, the proposed changes would directly address the two largest issues facing the state’s retirement system. Implementing a funding strategy to address the state’s largest public debt helps reduce expensive long-term costs that burden Montana taxpayers. Aligning the retirement options with what best serves the vast majority of public workers ensures the Montana’s government remains efficient. That’s a win-win for Montanans.

This column originally appeared in Lee Newspapers

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