4 Changes Affecting State Pensions
By Mary Branham, CSG Managing Editor
Many states are taking unprecedented steps to address the massive unfunded liability in their government pension plans. Changes to existing benefits, for example, have been unheard of before, but now are on the table.
Keith Brainard, research director for the National Association of State Retirement Administrators, said more than 40 states have made changes to their pension plans since 2009, some of them more than once.
One thing actually reducing costs is the decreased state and local government workforce, Brainard said.
“More than 3 percent of state and local government workforce has gone away over the last three years,” he said. “That has multiple effects—it reduces payroll costs for the employer, but it also can reduce pension costs and pension liabilities.”
As for those employees still on the government payroll, here are four areas of change they’ll face in state pension systems.
1. WORK LONGER
Some states are changing the age requirements and adding years of service for employees to be eligible for retirement. Others have increased the vesting period for pension payments.
“Typically,” said Brainard, “a pension plan is based on the final average salary of the last three years. A lot of states have moved that from three to five years.”
And, he said, many states are increasing the penalty for employees who retire early or eliminating any financial incentive for them to retire early.
“It’s possible to have such a small reduction that an employee could decide that they would be just as well off to retire early,” Brainard said. That is changing, he said.
2. PAY MORE
Some states are increasing employee contributions for their retirement benefits.
“A lot of states that have increased employee contributions have also reduced employer contributions,” said Brainard. “They’ve basically swapped out contributions with some of the employees and offset the additional costs by having employees pick those up.”
But some states, he said, have increased what the state and local governments are contributing to the pension plans.
The higher employee contributions could be set on a tiered basis, with existing employees paying less than future employees, Brainard said. Missouri, for instance, established a new tier for contributions by employees hired as of July 1, 2010. Previously, state employees were not required to contribute to their pension plans.
3. GET LESS
Some states are reducing, or even freezing, cost-of-living adjustments, or COLAs.
Colorado, Minnesota and South Dakota all adjusted statutory provisions covering COLAs for existing retirees. While those states’ decisions faced immediate lawsuits, other states are following in their footsteps in putting everything on the table in their efforts to fill the growing holes in their pension plans.
New Jersey, Brainard said, has postponed a COLA for retirees until its pension plans reach 80 percent funding level. That effectively takes the COLA off the table for several years. Maine has postponed its COLA for up to four years. In Oklahoma, which had an ad hoc COLA that required annual legislative approval, the legislature has said no COLAs will be given until they can be paid for, essentially taking them off the table indefinitely.
4. MAKE A SWITCH
Discussion was heavy a few years ago for switching from the traditional defined-benefits plan to a defined-contribution plan, similar to 401(k)s in the private sector. In reality only two states—Michigan state employees since 1997 and all Alaska public employees, since July 2006—have made a wholesale switch, said Brainard.
Some states, however, are looking at hybrid plans or offering a choice. Indiana, for instance, approved a defined contribution choice for new state hires beginning in 2012. Rhode Island is switching most active members, beginning in July, to a hybrid plan that will take the form of lower defined benefits combined with required participation in a defined-contribution plan.