This post originally appeared on my old blog on January 2, 2013 but did not make the transition to this site due to error. I decided to repost it with a new date after recovering it from a cached version on the web.
Rhode Island passed sweeping pension reform last fall, angering the major labor unions and progressives throughout the state. These reforms have significantly decreased both the short and long-run costs to the state, while decreasing the benefits of both current and future retirees.
One of the most controversial measures in the pension reform package was suspending annual raises 1 for current retirees. I have noticed two main critiques of this element. The first criticism was that ending this practice constitutes a decrease in benefits to existing retirees who did not consent to these changes, constituting a breach of contract and assault on property rights. This critique is outside of the scope of this post. What I would like to address is the second criticism, that annual raises are critical to retirement security due to inflation, especially for the most vulnerable pensioners who earn near-poverty level wages from their pensions.
While I am broadly supportive of the changes made to the pension system in Rhode Island, I also believe that it is important to recognize the differential impact suspending annual raises has on a retired statehouse janitor who currently earns \$22,000 a year from their pension and a former state department director earning \$70,000 a year from their pension. Protecting the income of those most vulnerable to inflation is a worthy goal 2.
I have a simple recommendation that I think can have a substantial, meaningful impact on the most vulnerable retirees at substantially less cost than annual raises. This recommendation will be attractive to liberals and conservatives, as well as the “business elite” that have long called for increasing Rhode Island’s competitiveness with neighboring states. It is time that Rhode Island leaves the company of just three other states– Minnesota, Nebraska, and Vermont– that have no tax exemptions for retirement income 3. Rhode Island should exempt all income from pensions and social security up to 200% of the federal poverty level from state income taxes. This would go a long way to ensuring retirement security for those who are the most in need. It would also bring greater parity between our tax code and popular retirement destination states, potentially decreasing the impulse to move to New Hampshire, North Carolina, and Florida.
It’s a progressive win. It’s a decrease in taxes that conservatives should like. It shouldn’t have a serious impact on revenues, especially if it goes a long way toward quelling the union and progressive rancor about the recent reforms. And it’s far from unprecedented– in fact, some form of retirement income tax exemption exists in virtually every other state.
We should not be proud of taking away our most vulnerable pensioners’ annual raises, even if it was necessary. Instead of ignoring the clear impact of this provision, my hope for 2013 is that we address it, while keeping an overall pretty good change to Rhode Island’s state retirement system.
- Not a cost-of-living adjustment, or COLA, as some call them. [return]
- Interesting, increases in food prices has largely slowed and the main driver of inflation are healthcare costs. I wonder to what extent Medicare/Medicaid and Obamacare shield retirees from rising healthcare costs [return]
- http://www.ncsl.org/documents/fiscal/TaxonPensions2011.pdf [return]