Three Ways to Reduce Maryland’s Pension Liabilities
ROCKVILLE, MD (March 4, 2019) — With Maryland’s State Retirement and Pension System $19.7 billion in the red, a new report urges Maryland to make three key reforms to stabilize the system’s finances and ensure the 400,000 Marylanders who depend on it receive their promised benefits. The full report, entitled How to Reduce Maryland’s Pension Liabilities, can be found at mdpolicy.org.
“Maryland’s state employee pension fund is billions of dollars underwater,” said Christopher B. Summers, president and chief executive officer of the Institute. “State employees and taxpayers have long deserved a bolder, more creative approach to the looming tsunami of pension debt. We believe lowering the state pension fund’s discount rate and embracing both index investing and hybrid plans are in the best interests of both taxpayers and retirees.”
The report, completed by Senior Policy Analyst Carol Park, compared Maryland’s pension fund with the 30 largest public pension funds in the United States. Based on that comparison, the Institute recommends Maryland policymakers:
Lower the fund’s discount rate: Discount rates are typically used to determine a public pension fund’s liabilities. A lower discount rate results in higher assumed liabilities and more funding from government. Maryland should lower the fund’s discount rate to help ensure that the state pays enough into the system to keep its promises to state retirees.
Shift to Index Investing: Shifting the majority of the fund’s assets to passive indexed investments would help ensure that the state does not waste hundreds of millions of taxpayer dollars on active investment managers on Wall Street. For Maryland, passively investing in pension funds would cost the state about $25 million per year, or five basis points yearly on invested capital, versus the present disclosed fee $333 million.
Embrace Hybrid Plans: Finally, hybrid plans that include define contribution components would preserve the traditional pension for the state employees, while helping the state mitigate the burden of unexpected cost increases. Approximately 77 million Americans currently have defined contribution retirement plans. By including a defined contribution component in its pension fund, Maryland would be following a model utilized by private sector employees across the country.
Many of the largest public pension funds in the U.S. have adopted some of these reforms and are on the path to becoming fully funded. Despite calls for sound pension reform, Maryland lags behind other states when it comes to pension fixes. It is time for Maryland to follow suit and adopt recommendations in this study to overcome its pension crisis.
The Institute has published extensive findings on Maryland’s chronically unfunded pension systems. Learn more at mdpolicy.org.
About the Maryland Public Policy Institute: Founded in 2001, the Maryland Public Policy Institute is a nonpartisan public policy research and education organization that focuses on state policy issues. The Institute’s mission is to formulate and promote public policies at all levels of government based on principles of free enterprise, limited government, and civil society. Learn more at mdpolicy.org.