Problems with Pensions

April 11, 2018

As a government employee instead of a regular retirement plan I participate in a pension. In the Commonwealth of Massachusetts participation in this pension is not optional. The end result of a pension is that when you vest you are entitled to fixed amount of money from the government once you retire. While it looks like a good benefit, Massachusetts pension system is riddled with traps and unfairly locks down talent in our mobile economy.

Massachusetts pension is not optional and highly punitive towards job switchers. You cannot accrue any pension benefit until you have been with the Commonwealth for at least ten years. During this time Commonwealth employees do not accumulate any credits towards social security since Massachusetts does not participate in it. If you decide to leave the system you can cash out your contribution but you only get credit for a meager amount of interest. For anyone planning to leave state employment before the end of ten years it is functionally a pay decrease.

Massachusetts pension system is also unequal. As part of the pension state employees are required to contribute 9% to 11% of their salaries to the pension. Although this contribution is excluded from federal taxes, the commonwealth taxes it as regular income. Then if you leave the commonwealth, unlike the result you obtain by staying in Massachusetts, many states will tax your pension distribution.

The scariest thing about putting all my eggs in this one basket is that despite having a higher than median contribution the Massachusetts pension remains underfunded. There is no guarantee the benefit will be what has been promised.

One saving grace is that Massachusetts does offer what it calls a SMART defined contribution plan. However it has made the mistake of not offering Vanguard as a place where retirees can make their investments. The SMART plan vendors charge fees to manage your money in a way that Vanguard does not. Massachusetts employees deserve the best low cost investment firm available and that is Vanguard.

The best investment firm. An alternative to the pension. Equal tax treatment. Participation in social security. These are all things Massachusetts can do to put itself at parity with the private sector and make its jobs more attractive to people in my generation.

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This work by Matt Zagaja is licensed under a Creative Commons Attribution-NonCommercial-ShareAlike 3.0 Unported License.