Public Workforce

Pension Inequalities

New state pension rules affect everyone but they depend on where you work, when you started work and if you were elected.
by | August 11, 2010

Shrinking budgets force states to make tough decisions on a number of spending issues, including how -- or how much -- to fund pensions for state employees. In some states, unions have fought plans for years to force employees to pay a minimum into the plan, expand vesting terms or push back the age of retirement. Those walls are beginning to break down.

For the 24 million active and retired members of public employee pension plans, 2010 has been a year of activity unlike any other. According to the National Conference of State Legislatures, 16 states have reduced employee benefits or required an increase in employee contributions to pension plans. But these changes affect public employees differently depending on date of hire, if they are a state or local employee and if they are elected or not.

In a handful of states, employees will increase their personal contributions to the plan, or begin contributing for the first time. In September, those enrolled in Wyoming's public pension plan will see the pension contribution increase for the first time in more than three decades. For some employees, this will mean they will be making their first contribution ever, because in Wyoming's plan the state is not allowed to cover the entire contribution increase for their employees. However, local governments that are part of the plan are free to decide whether to make the full contribution, or pass some of the increase along to their employees.

The Virginia Legislature also implemented employee contribution reforms: Anyone hired after July 1 will make a contribution of approximately 5 percent of their paycheck, but they will be doing so in return for less benefits upon retirement. Like Wyoming, rules about paying into the plan will not be equally spread among state and local employees. For the most part, local government employees will not have to pay in at all due to an amendment in the legislation.

Another inequity issue creeping up this year is the difference in benefits offered to elected and non-elected public employees. The most recent example of the disparity comes from Missouri. In late July, lawmakers passed an overhaul of the pension plan for state employees, saving the state approximately $660 million over the next ten years. Three big changes will be in effect for new employees starting jobs after January 2011: the age of retirement will rise from 62 to 67, they will need to work twice the amount of time than they currently do to become vested, and, for the first time ever, they will be required to contribute 4 percent of their paycheck to their pension account.

However, elected officials in the Show Me State will still be able to retire at age 62 -- up from age 55. In addition, rather than working 10 years to be fully vested, legislators only need to work for six. Statewide elected officials -- such as the governor or state auditor -- are vested after 4 years. The legislation, which passed by a slim margin, drew anger from some members of the state House, who called it little more than an example of legislators serving themselves rather than the citizens of the state. According to Karen Stohlgren, the deputy executive director with the Missouri State Employees' Retirement System, the vesting requirement was left at six years for legislators because of term limits in the state.

Missouri is not the only state to treat elected officials differently when it comes to vesting in pensions and retirement age. In Illinois, for example, backlash over legislators' favorable pension and retirement terms led to a reform package that raised lawmakers' retirement age to 67 and decreased how much they can collect in retirement. Lawmakers, however, will still be able to collect pension benefits sooner than many other state workers. (Also in this legislation, Illinois also took aim at judges [hired after January 1, 2011], a group that often receives more favorable benefits and terms, by cutting back what they are allowed to collect.)

There are reasonable arguments as to why elected officials have been immune from some pension changes. Many legislators are term-limited, preventing them from becoming entirely vested. The need to run for reelection may cause legislators to face uncertain job security, also risking that they may not hold their positions long enough to become fully vested. "In the states with long vesting periods," says Ron Snell, the director of state services with the National Conference of State Legislatures, "public officials wouldn't be eligible for public pension benefits at all" if they are not allowed shortened vesting timeframes.

 A concern from critics of recent legislation, like that in Missouri, is that non-elected state workers are being asked to make bigger sacrifices than their elected counterparts. But, according to Steven Kreisberg, Director of Collective Bargaining with the American Federation of State, County and Municipal Employees (AFSCME), non-elected public employees are not always concerned with the disparity. "It comes up when they attack our member benefits. Then the hypocrisy is more obvious. But for the most part, if the benefits are solid, they're not looking over at the benefits received by elected officials," Kreisberg said.

In some cases, non-elected employees have benefited from pension reform more so than elected employees -- some states bar legislators from participating in pension plans all together, or limit the type of participation involved. In Utah, legislators have for years been able to choose between a defined benefit or defined contribution plan while non-elected state employees were given a defined benefit plan. Legislators are now limited to the defined contribution plan if elected after July 1, 2011, while their newly-hired non-elected counterparts can choose from two plans -- either defined contribution (a non-guaranteed 401(k)-style plan) or a hybrid plan of defined benefit (guaranteed) and defined contribution.

State pension plans needed changes so they can be sustainable for years to come, and having some inequalities -- while they may not be fair -- could help ensure that everyone has an opportunity for their own secure retirement.

Are some inequalities more fair than others? Let me know by submitting a comment or by e-mailing hkerrigan@governing.com with your thoughts.

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