Retirement benefits overhaul in Rhode Island transfers risk to employees

Share This

It may have taken the Rhode Island General Assembly only one month to pass a sweeping overhaul of public employee pension plans, but the residual effects on workers will last a lifetime. 

“While companies that manage private investments will benefit from this bill, thousands of dedicated [public employees], including teachers, school support staff, nurses, and state and municipal workers, will watch their standard of living erode because the General Assembly and the governor were in such a hurry to pass this legislation,” says Rhode Island Federation of Teachers and Health Professionals president Frank Flynn, who also is an AFT vice president. 

The Rhode Island Retirement Security Coalition, which includes the AFT affiliate, will fight to overturn the pension changes in futures sessions of the Rhode Island General Assembly, Flynn vowed. 

The RIFTHP joined other unions and allies in the coalition to defeat the pension overhaul that Gov. Lincoln Chafee unveiled on Oct. 18. Despite the coalition’s strenuous community outreach—and uproar—the grass-roots activism was no match for a governor, state treasurer and General Assembly that were intent on making workers pay the consequences for the retirement system’s $7 billion unfunded liability. 

Like public pension plans across the nation, the retirement plans administered by the Employees’ Retirement System of Rhode Island that cover public school teachers, municipal workers, state employees and others were rocked by the stock markets’ poor performance over the past several years. 

Employer indiscretions, however, also have played a prominent role in the funding shortfall of Rhode Island’s plans. Namely, while workers have been making their required payments into their respective plans—9.5 percent of teachers’ pay and 8.75 percent of state workers’ pay, for example—employers have not been depositing their full required contributions into the plans. 

“This problem has taken 60 years to get to this point, and it cannot be addressed with a ‘quick fix’ remedy,” Flynn says. 

The Rhode Island Retirement Security Act of 2011, which was signed into law Nov. 18, institutes, among other things, a hybrid retirement system composed of a diminished defined-benefit component and a new defined-contribution individual retirement account component for most public employees starting July 1, 2012. The law is notable because it applies to current workers—not just new employees. 

In addition to instituting a hybrid retirement benefit structure, the new law indefinitely suspends cost-of-living adjustments for current retirees and raises the retirement age for most workers. (For example, for state employees with fewer than five years of service on June 30, 2012, the new retirement age will correspond to their Social Security retirement age.) 

Under the existing defined-benefit plans, and dependent upon years of service and final average salary, teachers and state employees could plan on retirement income equivalent to 75 to 80 percent of their final average salaries. However, according to the state’s actuaries, the maximum salary replacement available from the defined-benefit component under the hybrid plan will be 40 percent—again, based on years of service and final average salary.

 Under the new hybrid retirement system structure:

  • Teacher and state employee contribution rates to the defined-benefit plan will be 3.75 percent of salary; contribution rates to their defined-contribution accounts will be 5 percent of salary. (Teachers who work in school districts that do not participate in Social Security will be required to contribute an additional 2 percent of their salaries to their defined-contribution accounts.) 
  • The formula for the defined-benefit component will be years of service multiplied by 1 percent of salary, which will be based on the highest five-year average compensation. 
  • Employers will contribute 1 percent of an employee’s salary to the employee’s defined-contribution account. (School districts that do not participate in Social Security will contribute an additional 2 percent of a teacher’s salary to his or her defined-contribution account.) 

Both houses of the Democratic-controlled General Assembly passed the Rhode Island Retirement Security Act on Nov. 17; and Gov. Chafee signed it into law Nov. 18.