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Lawmaker eyes state retirement overhaul

Oxford Republican: State should consider switching systems

By Susan M. Cover scover@mainetoday.com
MaineToday Media State House Writer

AUGUSTA -- An Oxford Republican wants the state to look at changing the state retirement system with the goal of avoiding the creation of a new unfunded liability.

Rep. Jim Hamper, R-Oxford.

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Rep. James Hamper said Thursday he'd like lawmakers to consider switching to a contribution-based system such as a 401(k), or to having the state join Social Security.

Changes made now won't help the state cope with the current unfunded actuarial liability, which is debt that began piling up in the 1970s. But Hamper said the state should look toward the future when thinking about what kind of retirement benefit to offer to new hires.

Hamper's proposal to switch retirement funding was first reported this week in The New York Times.

"My bill is to get the conversation going," he said Thursday. "Let's start talking about this."

Hamper's bill follows action two years ago to create a task force to study the retirement system. Sen. Peter Mills, R-Cornville, sponsored the legislation and said his interest continues to be in making the system more responsive to the needs of modern-day workers who tend to switch jobs frequently.

As it is now, Maine is one of two states in New England that does not participate in Social Security, which means workers who switch from the private sector to state work -- or vice versa -- get reduced benefits when they retire.

Also, Mills said the current system doesn't reward lower-paid state workers as much as Social Security does.

"I've never suggested this would save money," he said.

A task force report released in March showed that changing from the current system to anything else would cost the state more money. The group did not recommend any changes, but outlined the different options and what each would cost. As it is now, the state pays 5.5 percent of payroll into the retirement system. Social Security would cost the state 6.2 percent, but would continue to benefit workers whether they are employed by the state or not.

Under the current system, the state saves money because fewer than half of employees -- who contribute 7.65 percent of their pay to the system -- eventually retire from the state and receive a monthly benefit.

Maine has a defined benefit plan, which means employees who reach retirement age are guaranteed a fixed monthly amount when they retire. All of the investment risk is borne by the state, not the employee.

Defined contribution plans, such as a 401(k), place the risk in the hands of employees, who make their own investment decisions and are not guaranteed a certain level of benefit when they retire. If the state switched to Social Security and a 401(k), the cost to the state would be a 9.2 percent annual cost, compared to the 5.5 percent cost of the current plan, according to the retirement system.

Appropriations Committee members said they are aware of the looming debt in the retirement system -- and complaints from some workers -- but they do not believe there's a lot of traction in the Legislature to overhaul the system. Appropriations Committee House Chairwoman Emily Cain, D-Orono, said it will be up to the new governor and newly elected Legislature to decide whether this is an issue that should be tackled.

Regardless of the long-term plan, the state will be required to pay $916 million into the system in the next budget cycle -- an increase of $287 million from the last two-year period, according to the retirement system.

The amount of the unfunded liability changes depending on the stock market. The retirement system saw losses of nearly 19 percent in 2009.

"There are some frustrations from people in the system about the incompatibility with Social Security, but I'm not sure anyone has any concrete proposal moving through the process," Cain said.

Hamper, a member of the Labor Committee, said that, if he's re-elected this fall, he wants to get the state thinking beyond 2028, when the current unfunded liability must be paid.

"I think the unfunded liability is very important in the grand scheme of things," he said."That bill's coming due. This is not going to affect that bill."

Susan Cover -- 620-7015

scover@mainetoday.com