In 2015, the Malloy administration commissioned a study of Connecticut’s State Employees Retirement System (SERS) by the Center for Retirement Research, a prominent pension research institute. While the center’s report was well done and most of its recommendations were adopted by the state, the center miscalculated the level of employee pension benefits, saying they were not “overly generous.” They were and, today, still are overgenerous.
The center’s error has distorted subsequent debate about state employee compensation, the origins of the drastic underfunding of SERS, the high cost to the state of pension benefits, and the inevitable escalation of the state’s annual contribution to SERS.
The center stated that “The main cost driver for SERS is the unfunded liability from legacy costs and funding shortfalls, not overly generous benefits to members (employees and retirees).”
The statement is correct, except that many state employee union supporters and apologists have misinterpreted it to say “The only cost driver for SERS is the unfunded liability from legacy costs and funding shortfalls ...” That is not correct.
Misinterpretation is understandable in light of another statement by the center “the cost of benefits provided to current employees (the total normal cost) is actually below (the national) average for similar plans.”
This second statement was erroneous. It relied upon analysis which glossed over the key question of who bears “the cost.” The cost of benefits is borne both by the state and by employees who contribute to their own pensions.
Because Connecticut employees contributed so little to their own pensions, the cost to the State of Connecticut was actually higher than the average cost of pension benefits in the 50 states.
Here are the numbers from the center’s study (page 17). In 2014, the State of Connecticut contributed 8 percent to SERS, while the 50-state average state contribution was 7 percent. These percentages are pension cost as a percent of payroll cost.
The higher level in Connecticut was necessary because state employees contributed only 2.2 percent to their own pensions, while the 50-state average employee contribution was triple that amount, or 6.6 percent.
The differential between Connecticut’s 8 percent and the national average of 7 percent amounted to a 14.3 percent higher level in Connecticut.
Either way you look at the extra 14.3 percent — as a higher state cost or as a larger employee benefit — it was both overly generous and above the national average.
So how did the center get it wrong? It ignored employee contributions. It looked only at the gross unallocated cost of pension benefits, namely 10.2 percent in Connecticut versus an average of 13.6 percent in the 50 states. This creates an illusion opposite to reality.
The fair and accurate measure is net cost for the state and net benefit for employees, which, in Connecticut, was 8 percent. The gross cost of the benefit of 10.2 percent was offset by the employee contributions of 2.2 percent, leaving both the state’s net cost and the employee’s net benefit at 8 percent. Nationally, a gross cost of 13.6 percent was offset by employee contributions of 6.6 percent, leaving a lower net cost/benefit of 7 percent.
The center stated at the outset of its study that SERS was only 42 percent funded in 2014, “among the lowest in the nation.” A state with a severely underfunded pension fund should not be bearing a higher-than-average cost to provide its employees more generous pension benefits than states with better-funded pensions.
Yet Connecticut has been doing exactly that, with the consequence that SERS remains among the lowest funded pension funds in the nation, and with the further consequence that the pension cost for the state increases every year, both absolutely and as a percent of the state’s overall budget.
And pension benefits are not the only element of “generosity” in Connecticut. State employees enjoy better wages and more robust health care benefits than state employees in the other states. It should be noted that Connecticut’s higher wages further skewed the results of the center’s pension benefits analysis. With pension benefits measured as a percent of wages (“payroll”), Connecticut’s higher wages made its pension benefits appear to be lower, or less generous.
However, the larger issue is total compensation. There have been five studies of total state employee compensation in Connecticut. The first was a Connecticut state commission’s study in 2010. Yankee Institute commissioned studies of Connecticut in 2015 and again in 2020. Finally, the American Enterprise Institute carried out two studies comparing all 50 states, the first in 2014 and the second in 2019 (covering both state and municipal employees).
All five studies compared state employee compensation to private sector compensation. In all five, Connecticut state employees earned from about 30 percent to more than 40 percent more than the state’s private sector employees, the highest gap in the nation. That is both unfair and unsustainable.
Greenwich resident Red Jahncke is president of The Townsend Group Intl, a business consultancy in Connecticut, and a freelance columnist published in national and Connecticut newspapers.
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Red Jahncke (opinion): Discourse over CT employee pensions driven by a distorted report - The Advocate
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