Part of the turmoil in Wisconsin deals with what public employees should pay toward their state retirement. Governor Scott Walker wants them to start paying 5.8% of salary. Due to union contracts, they pay little now.
Unlike Mississippi, Wisconsin does not need the increase in employee contributions to shore up its retirement system. That’s in great financial shape. Walker wants the increase to reduce what state government has to pay, currently about 12%.
In Mississippi, the retirement system is demanding more money to overcome a growing financial shortfall, even though employees pay 9% and the state 12% for a total of 21%.
Whoa! You mean the union negotiated retirement plan in Wisconsin costs less than the non-union plan in Mississippi?
Yep. You see, conservative Mississippi pays higher retirement benefits than traditionally liberal Wisconsin.
1999 was a big year for both plans. That’s when Wisconsin cut benefits while Mississippi upped benefits. Wisconsin reduced the annual benefit factor used to calculate retirement from 1.765% to 1.6%. Mississippi increased the two benefit factors it uses: from 1.785% to 2.0% for each of the first 25 years of service; from 2.25% to 2.50% for each year thereafter.
Now, here’s the real kicker. Mississippi applied those higher benefits backwards. So, someone who had been in the system for, say, 20 years in 1999 didn’t just get the higher benefit going forward, he or she got it for all years. Since the contribution rates prior to 1999 had been calculated to fund the lower benefits, that decision put enormous stress on the system.
Wisconsin, on the other hand, applied its rate changes going forward from the date of change. No doubt that’s why Wisconsin’s retirement plan has a zero unfunded liability while Mississippi has a 36% and growing shortfall. To overcome this shortfall, in addition to increased employer contributions, the Mississippi Legislature has upped what employees’ pay from 7.25% to 9% and increased the years of service required of new employees for vesting from 4 to 8 and for retirement from 25 to 30.
What all this means is that new and future employees take the lumps for the Legislature’s bad decisions. They get to pay more and work longer so the system can pay the backdated higher benefits received by current retirees.
You might think the retirement board could trim benefits for current retirees when contributions are insufficient. Interestingly, the Wisconsin board has that authority. The Mississippi board does not. It can only increase the employer contribution rate, which it plans to bump to 12.93% later this year.
No wonder Governor Haley Barbour called for a comprehensive review of our retirement system. It’s more liberal, costly, and financially shaky than Wisconsin’s.
(For the record, Wisconsin’s average annual compensation for public employees is $4,400 higher than Mississippi’s, but Mississippi compensation has risen faster since 2000.)