The Impact of SB102 on New Hires

Jeff Morford Jeff Morford

Senate bill 102 would require new hires to enter a 401K-style plan instead of the current hybrid pension. In the short term this may cost the state  $5 billion in transition costs because new members will not pay into the pension system and accounting guidelines require accelerated payment of the eventual obligations in closed pension systems. There are also costs because the state would pay more into the 401K fund than they do to the current hybrid.

John McDonald has made the argument that this reduces solvency of the existing pension and erodes the political power of current pension system members as fewer members are in the system to support it. I wanted to share the impact on new employees.

Under the new plan the employer would contribute 4% automatically. They would then match the next 3% the employee contributed.

For example:

Employee

Employer

Total

0%

4%

4%

1%

5%

6%

2%

6%

8%

3%

7%

10%

4%

7%

11%

5%

7%

12%

6% 7%

13%

The state’s own auditors expect that a new employee who works for 40+ years, contributes 7.5%, and receives 2% raises per year would make less under the new plan than the hybrid even if growth rates of the investments are at 5%. And of course both of these are much lower than the defined benefit plan. Lately the raise and investment growth projections both seem dubious as well.

It is not clear how this would affect our current ORP option of 4% employee  + 12% employer = 16% in the long term. Obviously the current ORP is a better plan than the proposed plan and may eventually be on the Republicans’ radar.

Call your senator following the directions from John if you read this before the senate vote.

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