How much are public-sector pensions shrinking? Often, a lot

CHICAGO Tue May 20, 2014 10:38am EDT

An elderly couple looks out at the ocean as they sit on a park bench in La Jolla, California November 13, 2013. REUTERS/Mike Blake

An elderly couple looks out at the ocean as they sit on a park bench in La Jolla, California November 13, 2013.

Credit: Reuters/Mike Blake

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CHICAGO (Reuters) - You'd have to be living in a cave not to have heard that many states are bailing out struggling pension plans by cutting benefits. But how will that affect workers in those states? Researchers who have been sorting through the cuts say the picture isn't pretty.

Some 15 million state and local workers - about 12 percent of the nation's workforce - are active participants in defined-benefit (DB) pension plans, according to the U.S. Bureau of Labor Statistics. Since the financial crash of 2008-2009, 45 states have changed their pension plans, a new study by the National Association of State Retirement Administrators (NASRA) and the Center for State & Local Government Excellence (SLGE) reports.

Public employee unions are challenging many of the reforms in court on constitutional grounds, since state constitutions often contain provisions protecting pension benefits. But in states where cuts are upheld, the impact on many pension programs will be sharp, with lifetime benefits cut as much as 20 percent. Inflation protection also will be eliminated in many cases, and some workers will find themselves shouldering more individual risk and responsibility as plans shift from defined-benefit to defined-contribution structures.

"Welcome to my world," you might think, if you work in the private sector. There, DB pensions are vanishing, and retirees who have them don't get inflation raises.

But keep in mind that public-sector retirement benefits are a different animal. DB pensions are a form of deferred compensation that offsets lower salaries in the public sector, especially in highly skilled professional occupations.

About 30 percent of state and municipal workers don't have the additional retirement protection of Social Security, according to the Center for Retirement Research at Boston College (CRR). And unlike private-sector DB plans, most government workers contribute hefty amounts from their salaries to the plans. In plans that don't also participate in Social Security, the median contribution is 8 percent of pay, according to NASRA; in systems that do participate in Social Security, the average contribution rate is 5.7 percent.

Seventeen states have reduced or eliminated cost-of-living adjustment (COLA) benefits for workers and retirees, according to CRR. Some of these COLAs - fixed guarantees ranging from 2.5 percent to 3.5 percent - made little sense. In a low-inflation year, they would be unnecessarily generous, and would be insufficient in a high inflation year. Some new formulas tie COLAs to the national consumer price index, while others make them conditional on the plan's financial health.

Still, the impact of reduced COLAs over the course of a retirement can be dramatic. Eliminating a 2 percent compounded COLA would cut a worker's lifetime benefits by 15 percent to 17 percent, CRR calculates. Eliminating a 3 percent COLA translates into a 22 percent to 25 percent cut.

The NASRA/SLGE report analyzed 29 states that have changed their DB formulas, or have switched to a hybrid design with DB and defined contributions. (The study looked at the impact on general state employees; it didn't include teachers or first responders.) The changes include an increase in the number of years used to calculate the final average salary and multiplier formulas that are used to determine the percent of final pay that workers will receive in benefits.

Cuts in annual benefit amounts ranged from 1.2 percent in Massachusetts and Texas to 20 percent in Pennsylvania and Alabama. The average across all states was 7.5 percent.

The key implication: Workers will need to save more to maintain their standard of living in retirement. In Alabama, for example, the study calculates, workers joining the system in 2013 will need $351,000 in saving to replace 75 percent of pre-retirement income. That's up from $202,000 before the reforms were passed.

"The results point to the greater role that supplemental saving will play in the future," said Elizabeth Kellar, chief executive officer of SLGE. "If basic benefits aren't as generous, people are going to have to find another way to meet their needs in retirement."

The pension cuts come as state governments report having a tougher time recruiting and retaining workers since the 2008 recession, especially for skilled positions such as engineers, finance executives and healthcare professionals.

"Many of these states haven't been able to give their workers a raise for as many as six years," Kellar says. "The combined effects of asking workers to pay more for benefits and working for stagnant pay tells us this problem is only going to get tougher."

(The opinions expressed here are those of the author, a columnist for Reuters.)

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Editing by Douglas Royalty)

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Comments (3)
SeanTankarian wrote:
Issues that affect the public sector have usually already hit the private sector. Private sector pensions are nearly a thing of the past and public sector pensions are heading in the same direction. The bottom line is that the pension issue at the core is a debt issue and dealing with debt is typically very painful.

May 20, 2014 1:45pm EDT  --  Report as abuse
vippy wrote:
Thank bill Clinton for this! Reich, Rubin and Summers convinced him to let them get their hands on all that money just sitting there when it could be re-invested and it was invested alright, they got rich and the poor chap out there got robbed. Now they claim the coffers are empty!

May 22, 2014 4:41pm EDT  --  Report as abuse
Bruce999 wrote:
Individual numbers (1.2% in MA, 20% in PA) need a context so we can answer the question “so what?” How do the effective payouts compare between states, cities, etc.? Getting no raise in years might mean nothing except inflation was low. Clearly we’ve overpromised (or make the case that it was reasonable) and now we have to adjust.

As a military retiree I get to listen to plans to cut COLA, so I get it, but this isn’t useful information unless we can put a number on it that we can compare. Business has to periodically cut back as the situation and times change. Government is no different but we seem to think otherwise. Let’s fix it intelligently now and get over it so we don’t have a crisis every year (SS is a good example of where we’ve done this in the past — thanks for your good coverage on SS).

If the country/economy as a whole is not doing well, don’t expect the government to do anything but best effort and that means possibly not getting what was predicted (there are no guarantees, but death and taxes).

Report the data and comparisons that tell us what it really means. Otherwise it is just cheap sensationalism and does not instill confidence nor credibility.

May 22, 2014 8:23pm EDT  --  Report as abuse
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