Starting in 2016 Virginia will require social workers, teachers, and other municipal employees to pay 5 percent of their salaries into their pension plans. But instead of merely requiring employees to contribute the 5 percent, the state legislature simultaneously required localities to match those contributions with increases in base salary. That may sound like a simple plan, but it's turning out to be complicated. AsThe Daily Progress reported earlier this week, districts can contribute to a pension plan on an employee's behalf without incurring Social Security and Medicare taxes. But if the district raises salaries so that a teacher pays the pension plan, the teacher incurs taxes along the way. To make the same 5 percent contribution rate, Charlottesville, VA schools actually raised teacher salaries by 5.4 percent to ensure that teachers didn't have their take-home pay diminished.
Over time, this may eventually shift the inter-generational cost burden as well. Because pensions are based on an employee's final average salary, when districts increase salaries they're also increasing future pension payments. For teachers retiring soon after the change, in 2016 or 2017, they'll only pay the 5 percent contribution rate for one or two years but will reap the benefit of an increased pension for the rest of their lives.
The article doesn't get into this, but one upside to Virginia's change is enhancing transparency around public-sector employee compensation package. In too many places, employers pick up all or a large share of pension and healthcare costs, obscuring the real costs of the benefits. Workers tend to appreciate a dollar in salary more than a dollar in benefits, and it's a good thing to have more transparency about where their dollars are being allocated.
As legislators in Illinois and other states face similar dilemmas about who pays the costs of pension payments, they should keep in mind these issues of fairness, equity, and transparency.