Facing ballooning bills and strained budgets, 45 states
have either cut pension benefits or increased mandatory
employee retirement plan contributions, or both, since
2009.
While some of the changes and cutbacks impact
current state workers and retirees, the most
significant ones affect new hires. As a result, those
who become firefighters, teachers, garbage men or other
public sector workers after the cuts go into effect
will end up with considerably smaller nest eggs.
Take California: A state highway patrol officer hired before
September 2010 can retire at age 50 after 30 years on
the job with 90% of his salary. At an average salary of
$100,000, that would translate into a pension of
$90,000 a year. But if that same officer was hired this
year instead, his annual retirement check at age 50
would total $60,000. That's a $900,000 difference over
the course of a 30-year retirement.
In New York, a public employee hired in April 2012
or later will retire with benefits that are roughly
11% lower than someone hired a month earlier, according
to the National Conference of State Legislatures.
In Pennsylvania, workers hired in 2011 or later will
contribute the same chunk of their paychecks to their
pensions as those hired before them but will receive
about 20% less come retirement.
And in Alabama, state employees hired this year will
have to work longer to qualify for retirement benefits
that will be roughly 20% lower than those promised to
workers hired last year -- although new employees will
contribute slightly less out of each paycheck.
Benefits for employees who are already on the
payrolls are contractually obligated so major changes
would require making an agreement at the bargaining
table.
Some state laws even bar the reduction of
benefits for current employees, leaving new hires as
the main targets for cost cuts.
"These people are not at the table; they do not have
a voice," Center for Retirement Research Director Alicia
Munnell and Rebecca Cannon Fraenkel said in a January
report on cuts to teacher pension plans.
Proponents say that the cuts
trim excessive benefit levels, especially among top
earners who have retired with six-figure pension
checks.
"(Pensions) are taking away from the essential
services that our constituents need and deserve," New
York City Mayor Michael Bloomberg said in a speech in
Albany, N.Y., last year. "We see how they're increasing
our tax rates all across this state, money that's
coming out of the pockets of people who are working
hard trying to make ends meet."
Many states expanded benefits when times were
flush without setting aside extra cash to fund them.
When the recession hit, major investment losses
combined with plummeting tax revenues created a pension
burden that was far greater than many states and cities
could handle.
In 2010, the gap between what states had
promised in retirement benefits and the amount of cash
they had set aside to fund them was $1.38 trillion,
according to the Pew Center. Yet, critics counter that
the states' pension cuts could leave millions of future
retirees without an adequate safety net.
In some states, public workers are exempt from Social Security
payments -- making pensions their main source of
retirement security. "For most of our members, their
pensions are their life savings," said Steven
Kreisberg, collective bargaining director for the
American Federation of State County and Municipal
Employees.
In Louisiana, state actuaries cautioned
against switching new workers to a cash balance pension
plan -- where payments are largely determined by the
performance of invested contributions instead of a
percentage of the worker's final salary -- since the
change limits benefits for employees who become
disabled or for family members of employees who die
before reaching retirement age.
"Because there is no Social Security coverage, such
a member may very well become a ward of the state because
he or she has no other available resources," the actuaries
wrote. That plan, scheduled to take effect in July, is
now in limbo after a Baton Rouge judge ruled last month
that the law was unconstitutional for not receiving
a two-thirds vote in the state legislature. State
Governor Bobby Jindal plans to appeal the ruling.
Before the recession, studies showed that public and
private-sector workers had roughly equal compensation
when both salaries and benefits were considered, said
Jean-Pierre Aubry, at Boston College's Center for
Retirement Research. "But now, with the cuts, employees
should recognize that there is a chance that they might
be getting a worse deal than in the private sector" he
said.
In their report on teacher pension cuts, Munnell
and Fraenkel warned that cutting pension benefits
without increasing salaries could hurt the recruitment
of quality public school teachers. "Cutting their
compensation is not costless," the report said. "It
will almost certainly result in a lower quality of
applicants for one of the nation's most important
jobs."
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