AUGUSTA — The state will owe less to its retirement system in future years thanks to reforms in its new budget, but retirees aren’t happy about changes that will mean smaller increases in benefit checks.

Retirees won’t receive cost-of-living increases for at least one year, future increases will be capped at 3 percent instead of 4 percent, and the increases will be applied only to the first $20,000 of annual retirement income.

New hires and workers with less than five years of service will have to turn 65 before they qualify for benefits.

The reforms are part of the $6 billion, two-year budget that took effect July 1. While Republican and Democratic lawmakers praised the changes as a needed step in the right direction, people who are affected say they unfairly target state workers and teachers.

“Our members are very, very angry,” said Chris Galgay, president of the Maine Education Association. “To cap it at $20,000 just seems unfair.”

Before the change, cost-of-living increases applied to all of a retiree’s annual benefit. While the average benefit for state workers is about $18,000, the average for retired teachers is $22,000.

Galgay said some retired teachers have earned annual benefits closer to $30,000, so “only two-thirds of their retirement check will get” the cost-of-living increase.

Lawmakers, who faced a constitutional mandate to pay off what was once more than $4 billion in long-term debt in the retirement system by 2028, said the reforms will make the system more affordable and give the state time to consider a new system for new hires.

Richard Rosen, R-Bucksport, Senate chairman of the Legislature’s Appropriations Committee, said lawmakers rejected more extreme proposals and “settled on a few very mainstream, common sense modifications” to the system.

Now, he wants to look to the future needs of state workers and teachers. “The reality in today’s workforce is that people seem more interested in being able to have benefits move with them,” he said.

Rosen authored a part of the budget that calls for a study to design a new retirement plan for teachers and state workers who are hired after June 30, 2015. The plan would have Maine join the Social Security system and include a supplemental pension plan for workers and teachers.

Maine is one of 39 states that have made significant reforms to pension systems in the last two years, according to the National Conference of State Legislatures.

Across the country, employee contributions have been increased, age and service requirements for benefits have been raised, and cost-of-living adjustments have been reduced.

Sandy Matheson, executive director of the Maine Public Employees Retirement System, said Maine became an early pension reformer when voters approved the constitutional amendment in 1995 to set a deadline for paying off the fund’s long-term debt.

“Maine’s problem was, it started from such a terribly underfunded situation back in the 1980s and early 1990s,” she said. “That’s the only issue with Maine’s plan, was that it had such a dreadful starting point back in the 1990s.”

In fact, she said, Maine’s pension system for teachers and state workers now shares six characteristics with well-run pension plans across the country. In addition to setting the 2028 deadline, the constitutional amendment prohibits the state from assuming any new unfunded liability. That means that if state lawmakers want to provide an enhanced benefit, it must be paid for through the state budget.

The amendment also requires that investment losses to be recovered within 10 years.

The state was on track to meet its 2028 payoff deadline before steep stock market losses in 2008 drove up annual costs. That will be particularly true for the period from 2012 to 2023, when the state will be required by the Constitution to make up the market losses.

Gov. Paul LePage made pension reform a cornerstone of his proposed two-year budget.

While lawmakers eliminated some of his most controversial proposals — including requiring state workers and teachers to contribute an additional 2 percent of their pay — the budget significantly lowers the amount the state will have to pay to the system.

The long-term unfunded liability was reduced by $1.7 billion and now stands at a projected $2.4 billion. Annual payments that will come from the state budget to fund the system also are much lower.

For example, the state was on a track that would have required payments of more than $700 million a year from 2019 through 2028. With the reforms, payments through the same period will be closer to $500 million a year.

Rep. Peggy Rotundo, D-Lewiston, the ranking Democrat on the Appropriations Committee, said Democrats wanted to do more to blunt the impact on retirees. They tried, but failed, to raise the income cap from $20,000 to $25,000 for cost-of-living increases. “We were troubled that state employees were being asked to shoulder the burden of a problem they had not created,” she said.

Starting this summer, Matheson will lead a working group that is expected to craft a proposal to close Maine’s current retirement system and replace it with a plan that supplements Social Security.

Maine’s teachers and state workers don’t contribute to Social Security, so they get no Social Security benefit when they retire. Even if they work outside of state government or teaching, their Social Security benefits are reduced because of federal law.

Maine is among just 14 states that do not cover teachers and/or state employees through Social Security. Last year, a task force released a study of the current plan and possible alternatives. Matheson said the new group will design a plan to complement Social Security.

The goal is to have a plan that helps attract and retain workers, is competitive with plans offered by similar employers, and limits the state’s long-term costs.

In addition to Matheson and a member from the Department of Administrative and Financial Services, the group will have one representative each from the Maine State Employees Association, the Maine Education Association and the Maine School Management Association.

The first meeting will be held in August. The five-member group has until January to complete its report.

One problem with joining Social Security is that it would cost the state more each year than the current plan. With the recent changes, the state’s share is 4.5 percent of a worker’s salary; Social Security requires a 6.2 percent contribution.

But Matheson said younger workers tend to change jobs more than older ones and want portable benefits, like Social Security. “Retirement plans are part of the workplace benefit package which allows you to bring the talent you need,” she said. “The individuals have a need to plan for lifelong retirement planning.”

Galgay, of the Maine Education Association, said he will be interested to see whether the plan would require the state to pay the cost of Social Security for teachers, or whether that would fall to school districts.

While school districts now pay the 6.2 percent of salary required by Social Security for employees who aren’t teachers, they don’t pay toward teacher retirement because it’s covered by the state.

Galgay said a shift to Social Security could add a huge cost for school districts.

Susan Cover — 620-7015

[email protected]

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