Real people are connected to every actuarial assumption
Pension reform sounds abstract and distant from everyday life. It is almost entirely confined to state- and local-government workers. Companies stopped giving pensions to their workers decades ago as they switched employees to 401(k)s and other voluntary-type retirement schemes. This removed enormous future liabilities from the balance sheets of companies and shifted the risk of adequate retirement means to individuals.
Public pensions plans are now squarely in the sights of state legislatures. They are terribly underfunded and have grown unsustainable. Changes, though, must be made within the law. For example, states cannot categorically take away pensions because they are “contracted obligations.” But states can and are chipping around the edges and making changes to things like “cost of living adjustments” (COLA) and the required retirement age.
These legislative modifications are being challenged in courts. This is not surprising since people don’t generally give up their benefits or rights on a voluntary basis. In many cases these pensions are the only thing that retirees will have to fund their retirement. Workers are not winning their court cases, though. The WSJ reports that:
In the Colorado ruling, District Court Judge Robert Hyatt said for decades the state has changed the way it calculates cost-of-living adjustments. “Decades of history and legislative language do not support Plaintiff’s position that they are contractually and constitutionally entitled in perpetuity to the cost of living adjustment in effect at the time of their respective retirements,” the ruling says.
The judge, however, did acknowledge retirees’ contractual rights to their underlying pensions.
But these workers who are losing future benefits are not merely numbers in a state budget. They are people who worked for decades and were made promises about what they would receive in retirement. Gina M. Raimondo, the Rhode Island General Treasurer, put it like this her pension reform report entitled “Truth in Numbers”:
Above all, it is important to remember that real people and families are connected to every number and every actuarial assumption in this report. Any proposed reform has immediate and direct consequences for hardworking state employees and teachers, who have done nothing wrong and contributed what was asked of them to the pension system. The problem does not lie with them; rather the problem is a poorly designed system that has been faltering for decades.
Another vital consideration is the hardworking Rhode Islanders outside the pension system, who are struggling to save for their own retirements, and are being asked to pay higher taxes, in good part, to fund the pension system. Of course, we all suffer if the state has to make severe cuts to vital public services to maintain the current pension system.
The entire nation faces changes of this type since federal entitlement programs also have future funding shortfalls. Our country has made so many promises that are impossible to keep. Let us have sympathy for public workers and then widen that circle to include all who will be receiving less. We may agree on the need to reduce benefits but we can still recognize that individuals are behind the numbers and reforms have immediate and direct consequences.
Pew Conference: State Pension and Retiree Health Benefits