Teachers, firefighters, police and
other government workers in states across America are facing a retirement crisis.
Half of all states haven’t saved enough to pay the benefits they promised
through public pensions. The bill — now in the trillions — is starting to come
due.
For more than a century, public
workers accepted lower salaries on the promise of a safety net later in life.
When their pension funds were flush with cash, some states cut back on
payments. Then came the dot-com crash, the 2008 recession and state budget
shortfalls, and those states suddenly found their pensions deep in the red.
“The most common reason these things
don’t turn out so well is because the state didn’t make the contributions,”
said Richard Johnson, program director of retirement policy at the Urban
Institute. States instead put that money into more immediate budget concerns,
such as education, he said.
As a result, some retirees are
already seeing smaller monthly checks and current employees and new hires may
see their pensions slashed further. Nationwide, public pensions are roughly 70
percent funded, falling below what national
standards consider to be healthy. Only one state – Wisconsin – has a
fully funded pension.
“One of the reasons that we accept
the low salary is that we won’t have to despair of our retirement,” Randy
Wieck, a public school teacher in Kentucky, told FRONTLINE in The
Pension Gamble. “It’s a promise and a good chunk of our salary is
taken out from day one and deposited into a retirement plan.”
Public pensions are about a third
funded in Kentucky, according to state annual reports in 2016 analyzed
by Bloomberg — a yawning gap that led to large
teacher protests in March 2018 and a controversial new pension law
that is currently
being challenged in the state supreme court. Kentucky is not alone:
New Jersey, Illinois, and Connecticut are facing similar challenges, according
to numbers by Pew
and Bloomberg.
Since the recession, states have
been scrambling to fix the problem — mostly by passing the shortfall on to
their employees.
That usually means employees must
contribute more toward their pensions and get fewer benefits. Since 2009, 35
states have passed legislation increasing what employees have to pay into their
pension plan, according to research
by the National Association of State Retirement Administrators, an organization
that supports traditional pensions. This change affected both current and new
employees in most situations.
More than half the states in the
U.S. now
require people to work longer or retire later before they can claim
their benefit. For example Colorado, which overhauled
its pensions earlier this year, raised the retirement age for new hires after
2020 to 64 years, from 60 and 58 for state employees and teachers,
respectively. Plans in several states have also reduced how much they pay in
pensions by changing how the pension benefit is calculated.
It’s more difficult to alter payouts
for people who have already retired, since those benefits are usually legally
protected. But some states have reduced what’s called the cost of living adjustment
paid to retirees, an annual increase that is supposed to shield payouts from
inflation. In 2013, for example, Kentucky’s largest public pension plan, with
more than 350,000
members, suspended
all cost of living adjustments until the system is 100 percent funded — a date
that’s still in question — or money is set aside by the state.
At least 13 states have passed laws committing to
bridging the financial gap. Some are taking creative approaches, like funneling
earnings from cigarette taxes or state-owned casinos into their pension funds.
In the past decade, government
contributions to pensions have increased dramatically — by about 76
percent, according to the Urban Institute’s Johnson, who made the calculation
based on census data.
Oregon, for example, passed
a law in 2018 that earmarked taxes on alcohol and marijuana and lottery
revenues, among other things, to help bankroll pensions. Last year, New Jersey dedicated
all earnings from the state lottery to the public pension fund, a move that
will generate $1 billion per year, according to a recent
report by the state’s independent pensions commission.
A handful of states have moved away
from the traditional pension model altogether, toward a 401(k)-style plan.
States find such models attractive because it can be cheaper. They contribute
less toward an employee’s retirement fund, and the financial risk is also
passed to the employee in a 401(k) plan — as are the investment decisions. For
employees, the plans have no guarantee: a person can save up a lifetime of
earnings for retirement, only to lose it all in a stock market crash.
The few states that have
experimented with the switch have faced considerable backlash from public
sector employees.
When the Oklahoma governor pushed
for a 401(k) pension plan in 2014, hundreds of teachers,
firefighters, and other state employees took to the streets to rally against
the proposed changes. Ultimately, new state employees would be moved
to a 401(k) plan after November 2015. After Alaska switched to a 401(k) system
in 2005, the state’s public safety department said in recent
report that prospective employees found jobs in other states more
attractive because of the retirement benefits.
“In Alaska, for example, one of the
things they found is they cannot recruit and retain public safety officers,”
Diane Oakley, executive director of the pro-pension National Institute on
Retirement Security, told FRONTLINE. “So, there’s almost a dozen trooper cars
sitting outside the headquarters, with no trooper to fill them.”
However, for the states that have
the biggest funding gaps in their pension plans, the risk isn’t just that
they’ll lose employees. “Long term, the biggest risk is to future taxpayers,”
said Johnson. “They’re the ones who are either going to have to pay higher
taxes… or going to have to accept fewer services, because a bigger share of
their tax money will have to go to close this funding gap.”
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