To the editor:
A recent Boston Herald article highlighting some of the largest public pension payments in Massachusetts understandably produced eye-catching numbers. A retiree receiving $200,000, $250,000 or even $300,000 a year is going to attract attention.
But those numbers, standing alone, create a misleading impression about what public pensions actually cost taxpayers.
I am a retired pension actuary who spent four decades working with retirement plans and have served for more than 30 years on a municipal retirement board. If we want a serious discussion about public pensions, we need to substitute facts for impressions.
Perhaps the most important missing fact is what Massachusetts public employees themselves pay for their retirement benefits.
Most employees hired since 1996 contribute 9% of regular compensation, plus another 2% of compensation above $30,000. For most career employees, that means more than 10% of their salary is mandatorily contributed to the retirement system every year for decades.
An employee earning $100,000 contributes $10,400 that year. At $150,000, the contribution is $15,900.
And those contributions are invested.
That last point is critical because Massachusetts’ statutory terminology can obscure the economics of pension financing. A retiree’s benefit is formally divided between an “annuity” and a “pension.” The annuity is derived from the employee’s accumulated contributions plus a relatively modest rate of interest credited to the employee’s individual account. The remainder of the promised retirement allowance is classified as the “pension.”
But that accounting convention does not tell us who economically financed the benefit.
The employee’s actual contributions are invested as part of the retirement system’s assets. Over decades, the investment earnings generated on those contributions can be enormous. The relevant economic question is therefore not how Massachusetts law labels different portions of the retirement check. It is this:
What would the employee’s mandatory contributions have accumulated to at the retirement system’s actual investment return, and how does that amount compare with the actuarial present value of the employee’s retirement benefits?
For many ordinary career employees, the answer may surprise taxpayers. Employee contributions and the investment earnings attributable to them can finance a substantial portion—and in some circumstances potentially most or all—of the actuarial value of the employee’s ordinary retirement benefit.
The power of compounding is easy to underestimate. Consider a hypothetical employee starting today at $75,000, receiving 4% annual salary increases and working for 30 years. Applying Massachusetts’ current contribution structure, that employee would contribute approximately $445,000 over the career.
Accumulated at a conservative 1% interest-crediting assumption, those contributions would amount to roughly $500,000.
Accumulated at an 8% investment return, however, those exact same contributions would grow to approximately $1.34 million.
That additional value does not disappear simply because Massachusetts’ statutory accounting system does not include it in what it calls the employee’s “annuity.” It remains in the retirement system and helps finance benefits, thereby reducing what taxpayers otherwise would have to contribute.
And this is not theoretical. Investment earnings have been an enormously important source of financing for Massachusetts public pensions. Over roughly four decades, many Massachusetts retirement systems have generated average annualized investment returns in the 8% to 9% range or better, while systems such as Wellesley and Haverhill have achieved equivalent annualized returns approaching 10%.
Compounded over 30 or 40 years, those returns are extraordinary. And the Herald itself reported that the PRIT Fund earned $14.7 billion in fiscal 2026, a 12.7% return, and grew to a record $129.5 billion even after paying benefits. Those investment earnings dramatically reduce the portion of pension costs ultimately borne by taxpayers.
There are other important facts that get lost when attention is focused exclusively on the largest pension checks.
Massachusetts pensions are generally based upon “regular compensation,” not total earnings. Chapter 32 of M.G.L. governing pensions excludes overtime, commissions, most bonuses, severance, unused vacation and sick-leave payments and numerous other forms of compensation from the pension calculation. There are limited statutory exceptions, but the popular notion that an employee can simply load up on overtime immediately before retirement and thereby “pad” a Massachusetts pension is generally wrong.
Nor are some of today’s extraordinary pensions representative of benefits available to employees entering public service now. Federal tax law limits pensionable compensation and qualified pension benefits, while Massachusetts imposes additional restrictions on pensionable compensation for newer employees. Some of the exceptionally large pensions attracting headlines today reflect legacy or grandfathered circumstances that cannot simply be replicated by today’s new hires.
None of this means public pensions cost taxpayers nothing.
Employers have real pension costs, including the cost of ancillary benefits such as disability and survivor benefits. Massachusetts also deliberately provides richer retirement benefits to public-safety employees such as police officers and firefighters.
There is a sound policy reason for doing so. These employees routinely assume risks to life and limb that most workers do not, and the physical demands and hazards of their jobs often make shorter careers and earlier retirement appropriate. Those enhanced benefits have a real employer cost, but they represent a conscious public-policy decision—not evidence that ordinary public pensions are excessively generous.
But the amount of someone’s annual pension check is not the same thing as the annual cost of providing that pension to taxpayers.
If we want to understand that cost, we should ask the questions an actuary would ask: How much did the employee contribute over a career? What did those contributions generate through decades of investment earnings? What is the actuarial present value of the benefits being paid? And after accounting for those employee-generated assets, what portion of the cost actually had to be financed by taxpayers?
Those are the numbers that matter.
A $200,000 annual pension does not mean taxpayers are paying $200,000 a year to provide it, any more than a retiree withdrawing $200,000 from a well-funded 401(k) means someone else is paying for that withdrawal.
Massachusetts public pensions should absolutely be scrutinized. But that scrutiny should be based on actuarial economics, not a list of eye-catching pension checks.
Those checks may make for dramatic headlines. But they do not, by themselves, tell us what public pensions cost taxpayers.
Let’s substitute facts for impressions.
David Kornwitz
Retired Pension Actuary
Chair, Wellesley Retirement Board
Writing in my personal capacity
