I was listening to this video segment below this morning from CNBC featuring Gina Raimondo, Rhode Island General Treasurer discussing how Rhode Island has bridged a substantial gap in their states' unfunded pension liability. What was the secret to their model? Well to me it wasn't much of a secret at all, increasing retirement ages, stopping COLA (Cost of Living Adjustment) for the foreseeable future, and moving people out of define benefit plans into contribution plans such as a 401k/403b. Obviously the onus and risk shift from the government to the individual but as Ms. Raimondo points out this is something that had to be done in order to save the entire system. As Raimondo put it she could not look a 30 something school teacher in the eye and tell them that they would have a secure retirement benefit waiting for them after they had paid in all these years.
This simply gets back to over promising benefits and under delivering results. According to Raimondo they sill have a 20% unfunded gap and are using a 7.5% annual rate of return assumption. As they discussed this point it was acknowledged that the assumption of 7.5% is pretty aggressive which is in part hampered by the Fed's continue low interest rate policies.
What amazes me regarding this story is how Raimondo was able to build consensus within the Rhode Island political structure to make so much headway with this issue. No one likes to take a cut in benefits but if you don't do something now there won't be anything left in the future. I like how Raimondo devised a plan where everyone need to contribute to solving the problem. It wasn't just cutting benefits for exiting retirees or those close to retirement but having the current generation step up as well.
I wish we could see this type of action and compromise throughout the rest of the country most importantly in DC.
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