States cap workers benefits to reduce shortfalls: Is your pension fund at risk?
States' pension fund holdings are short $1 trillion. Illinois's answer: Cut benefits for state workers. But even that might not be enough.
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"There are a lot of ways to do this without simply saying, 'Hey, your pension's gone.' Legally or politically, I can't see [a pension cut] happening," he says.Skip to next paragraph
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One way around state constitutions
State constitutions do provide one emergency option for governments to back out of their pension obligations, according to Amy Monahan, a professor at the University of Minnesota Law School who specializes in employee benefits. States have "police powers," she points out, which give them fundamental rights to protect the welfare of their citizens in a crisis, which in this case would allow a legal "out" in providing benefits. But when and how they could be applied is still in question because they have yet to be tested in court. "It's a big unknown," Ms. Monahan says.
The public sector workers under the most threat are new hires at the lower end of the pay scale, such as road crews or janitors, who have less mobility than higher-paid professionals.
"If you're a state worker, you don't have much recourse if your pension is reduced. They're in a worse situation," says J. Fred Giertz, an economics professor at the University of Illinois at Urbana-Champaign and an elected member of the State Universities Retirement System board of trustees.
Past reform measures have not kept pension funds from losing value, especially when state lawmakers don't follow through on promises to make up for previous shortfalls. In 2000, over half of states fully funded their pension systems, according to a 2010 study by the Pew Center on the States. By 2008, only four states had: Florida, New York, Washington, and Wisconsin. That's why the pension shortfall now stands at an estimated $1 trillion nationwide and is growing, Pew says.
One answer: a 401(k) for state workers
A possible solution may be to make the same change in public pensions that the private sector has largely already made. Instead of traditional pensions, which guarantee a fixed payment, states could fund 401(k) type retirement plans that only guarantee the level of pension contributions. In this scenario, the investment risk shifts to the employees.
Despite resistance from public-sector unions, more states will be looking at this type of system as state economies worsen, says Peter Zaleski, a professor of economics and statistics at the Villanova School of Business, outside Philadelphia. "I'm all for [pensions] if states are responsible enough to fund them. But the problem is they haven't been."