A Looming Black Hole in the State Budget?

As many of you know, I recently started a new job at the University of Maryland, Baltimore.  As such, I am a contractual state employee and I have the opportunity to participate in certain benefit plans available to state employees.  And so this morning, I found myself in the weekly three-hour new employee orientation. 

And one thing I learned made me go "holy shit!"

It basically comes down to this:  if Barack Obama is elected President, the entire State of Maryland may join in one large pants-crapping.  Let me explain.

The Maryland State Retirement and Pension System is the flagship defined-benefit pension plan for state workers.  Unlike a 401(k), 403(b), or 457(b) plan, the benefit is defined, not the contribution.

The contributions on the state employee work this way:  4% of your annual salary up to the Social Security Taxable Wage Base (currently $97,950), and 5% of your annual salary from $97,950 to $225,000. The state contribution to the plan is defined on a yearly basis through an actuarial analysis.  The state is mandated under State and Federal Law to keep the the plan solvent.

Here is where Barack Obama comes in.  He has advocated RAISING the Social Security Taxable Wage Base far above the $97,950 in order to cure the solvency issue.  Aside from the fact that most intelligent economists believe that raising the base will do no such thing -- it will merely push the date out, this could have a dramatic impact on the state's liability to fund the pension plan.

If the state pension plan link to the Wage Base is statutorily linked -- that is, that limit shifts up OR down based on what the Federal Government sets the rate to, then any shift in the rate UP means a smaller contribution to the pension plan on the part of employees and a LARGER contribution to the plan on the part of taxpayers.  In short, this adjustment will throw off the state's actuarial balance in the Pension Fund.  It would be, in short, an unfunded mandate on the part of the Federal Government.

Now, one may say "c'mon, a 1% shift isn't that big!"  But if you consider that 1% of $100,000 is $1,000, you are talking a sizeable chunk of change PER EMPLOYEE over $97,950 in annual salary that the state would have to make up.  And there are more of those than you think. When you factor in that the smaller number of employees at $97,950 and above are also subsidizing the pension plan for employees below the number -- especially those on the lowest end of the scale -- you are shrinking the pool of high wage earners that will help subisidize the entire plan.

And thus, we have a potential budgetary black hole thanks to Barack Obama's proposal to raise the Social Security Taxable Wage Base.

And thus I say "holy shit!"

Crossposted at Red Maryland