Source: Monique Morrissey, Economic Policy Institute, Briefing Paper #363, June 20, 2013
From the summary:
…This briefing paper provides an overview of the cuts to Rhode Island’s pension system since 2005. It begins by analyzing the cumulative effects on DB benefits of these cuts. It then examines ERSRI’s normal cost and unfunded liability, as well as benefit levels, prior to the cuts. Following this, the paper analyzes the changes ushered in by the first rounds of cuts (those in 2005, 2009, and 2010) and by RIRSA (which took effect in 2011). This narrative description of the changes since 2005 is followed by a timeline of the changes, which includes conservative estimates of the impact of successive cuts on benefits (see Appendix B for methodological details).
Principal findings include:
• Rhode Island was slower than most other states to fund its pension system. As a result, the Employees’ Retirement System of Rhode Island (ERSRI) had a shortfall even at the peak of the dot-com bubble, despite providing relatively modest benefits. Indeed, workers—many not covered by Social Security—contributed more toward these benefits than their counterparts in other states.
• While workers shouldered most of the cost of current benefits, employers failed to pay even their full (smaller) share, leaving ERSRI among the most underfunded plans in the country.
• Between 2005 and 2010, three rounds of cuts reduced pension benefits for a prototypical 30-year employee by 23 percent. Despite these cuts, the plan’s funded ratio declined further as a result of the 2008 stock market downturn.
• The funded ratio was further reduced by changes in accounting assumptions in 2010 that appeared timed to justify draconian changes to the system.
• The Rhode Island Retirement Security Act of 2011 (RIRSA) slashed defined-benefit pension benefits by roughly half (less for short-tenure workers, more for long-tenure workers) and introduced a supplemental defined contribution plan.
o This hybrid plan costs taxpayers more than the old system despite providing a less valuable and less secure benefit to workers.
o When taking into account the supplemental defined contribution plan, a prototypical 30-year worker would experience a cumulative 34 percent reduction in benefits between 2005 and 2012, with a quarter of 30-year workers experiencing cuts of 40 percent or more, depending on investment returns.
o The savings from RIRSA come not from switching to a hybrid system, but rather from cutting accrued benefits—a move that is being challenged in court.