From what has been leaked to the press, we now have an idea how the budget deal being put together by a few influential members of the General Assembly will treat state workers and contributions to the Virginia Retirement System. It appears they will be given a 5% raise and then have to pay 5% into VRS. Will that help the solvency of the VRS trust fund? Hardly. Like so many of McDonnell’s ideas, it will have the opposite effect. Use of an example shows how.
Take a person working in a state office and making $40,000 right now. After the budget amendments are passed, that person will earn $42,000 and pay $2,000 into VRS. Of course, the income subject to taxes will be the larger amount, meaning that the worker will not really see a “wash” here but will receive less in income.
As for VRS, because a person’s pension is based upon years of service and the highest three years of compensation, the 5% income increase means a larger payout over the lifetime of a retired worker.
Let’s say the person above is eligible to retire in three years. He was making $40,000 and now will have a gross income of $42,000. Using the calculator available at the VRS website, his pre-raise monthly retirement benefit would have been $1,700 per month. With the larger income for the last three years before his retirement, the benefit rises to $1,785 per month. That’s $1,020 per year for the rest of that person’s life. The state only recoups in income taxes on the higher income about $120 per year. So, for three years VRS gets more money from the worker and then for an unknown number of years will pay out a higher pension. Ironically, the plan to “add” money to the VRS trust fund will cost VRS more money. This is just another example of “McDonnell GOPer Math” in action.
There is no magic available to solve the dangerous underfunding of VRS. The problem has been caused primarily by the fact that for years the state government has paid less than its obligation to VRS. Instead, VRS has been used as a free bank to borrow funds and avoid raising taxes. This latest scheme McDonnell helped to concoct is like so many of his ideas, a failed method that avoids what must be done, in this case having the state live up to its responsibilities.