Pension Sustainability: Massachusetts

Analysis of Massachusetts's policies

As of January 1, 2010, the most recent date for which an actuarial valuation is available, Massachusetts's pension system for teachers is 63 percent funded and has an amortization period of 29 years. This means that if the plan earns its assumed rate of return and maintains current contribution rates, it would take the state 29 years to pay off its unfunded liabilities. While its amortization period meets regulatory benchmarks, Massachusetts's funding level is too low. The state's system is not financially sustainable according to actuarial benchmarks.

In addition, Massachusetts commits excessive resources toward its teachers' retirement system. The current employer contribution rate, which is paid by the state on behalf of local districts, of 22.6 percent is too high. The rate is set by law and is equivalent to the normal cost plus amortization payments, which must reduce the unfunded liability, to zero by June 30, 2040. The amortization payments increase by 4.5 percent a year. While this rate allows the state to pay off liabilities within the required 30-year period, it does so at great cost, precluding Massachusetts from spending those funds on other, more immediate means to retain talented teachers. The mandatory employee contribution rate of 11 percent is reasonable.

Citation

Annual Statement of the Financial Condition of the Massachusetts Teachers' Retirement System, for the year ended December 31, 2010 http://www.mass.gov/mtrs/4about/2010MTRSAnnualReport.pdf

Recommendations for Massachusetts

Ensure that the pension system is financially sustainable.
The state would be better off if its system was over 95 percent funded to allow more protection during financial downturns. However, Massachusetts should consider ways to improve its funding level without raising the contributions of the state. In fact, the state should work to decrease employer contributions. Committing excessive resources to pension benefits can negatively affect teacher recruitment and retention. Improving funding levels necessitates, in part, systemic changes in the state's pension system. Goals 4-G and 4-I provide suggestions for pension system structures that are both sustainable and fair.

State response to our analysis

Massachusetts was helpful in providing NCTQ with facts that enhanced this analysis. The state also noted that a pension reform bill is expected to be enacted in the fall of 2011.