Many new state workers — ranging from police officers to street cleaners — will retire with fewer retirement benefits than their current counterparts.
NEW YORK (CNNMoney)
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.
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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."
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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.
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State pension cuts could also affect the attraction and retention of future public employees and the quality of applicants.
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."
First Published: February 11, 2013: 5:47 AM ET
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