States see pension crisis looming despite cuts

Nearly every state in the US has made cuts to its public-employee pensions, seeking to dig out from the economic downturn, but so far the measures have fallen well short of bridging a nearly $1 trillion funding gap.

And since 2009, 45 states have rolled back pension benefits for teachers, police,
firefighters and other public workers, including cuts by Michigan and California this month. Next week, Republican Ohio Gov. John Kasich is expected to sign legislation requiring, for example, that certain teachers work longer and pay more toward their pensions.

And with the poor economy, it tells lawmakers and public union officials that the cuts are necessary, as at present, the plans aren’t sustainable. But in states such as Ohio, unions are digging in, not ready to accept the cuts. Also the new laws have trimmed just $100 billion out of the $900 billion gap between what the states and their workers put into their retirement plans and what the states owe in retirement benefits, according to estimates prepared for The Wall Street Journal by researchers at Boston College.

Then the unfunded liabilities in these states grew to troubling levels after investment losses in the 2008 financial crisis depleted pension assets. While most states have approved some form of pension cuts, many have opted to apply those changes only to workers who have yet to be hired.

Which now means most of the savings won’t be felt for decades. Changes made to the retirement plans of newly hired workers are expected to reduce pension costs by 25% over the next 35 year.

What got the states into this mess is that for many years, there was the attraction promised pensions and other benefits. That remains largely intact for current workers. Only a handful of states have replaced some guaranteed pension benefits with 401(k)-style retirement accounts that are commonplace in U.S. corporations.

Many states have avoided reducing benefits for current workers or retirees, saying the plans have legal protections. Courts in Minnesota and Colorado have ruled that cost-of-living raises can be reduced.

“There is a lot of gray area,” said Alicia Munnell, director of the Center for Retirement Research at Boston College. More states could try to cut future benefits for current workers because the laws aren’t clear, she said.

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California Gov. Jerry Brown, a Democrat, signed pension reductions he called the “biggest rollback to public pension benefits in the history of California pensions,” which are mostly for new hired employees. But the measures won’t immediately reduce unfunded liability, said spokesman for Calpers, the state pension fund.

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In California, pensions of current workers were “vested rights” that can’t be altered. States also have shifted more pension costs to employees. As of 2010, state workers were paying 10% more toward their retirement plans compared with three years earlier, according to Boston College. These increased contributions will gradually reduce unfunded liabilities.

The Teachers’ Retirement System of Illinois on Friday, said its pension bill to the state would increase by about $300 million in the fiscal year that starts next July. The higher costs derive from a pension board decision to lower its assumed rate of investment return, citing the “volatility of the world economy.”

The lower the expected return, the more the pension’s unfunded liabilities grow—unless the state fills the gap with higher contributions from employees or taxpayers, or tries to cut benefits.

In Ohio, lawmakers this month passed a series of changes that touch current and retired workers, along with new hires.

Many of the state’s public-employee unions supported the pension cuts less than a year after they fought a bruising battle with Republican lawmakers to retain their current rights to collective bargaining. But on the pension issue, many state laborleaders agreed that their members’ retirement benefits needed to be trimmed.

“It is a tough pill to swallow,” said Kevin Griffin, who is president of the local teachers union and an English teacher in Dublin, Ohio.

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