States scaling back public pension plans to close funding gap

By Laura Cohn
Sunday, May 16, 2010

If you thought earning a fat pension in a public-sector job was a sure thing, think again. According to an analysis by the Pew Center on the States, state and local pension plans are operating under a deficit of at least $1 trillion. A separate report on 125 state plans by Wilshire Consulting found that the ratio of assets to liabilities -- the funding ratio -- of state pension systems slipped to 65 percent in 2009 from 85 percent in 2008.

How did this happen? Simply put, the states didn't make big enough payments to their pension plans, they failed to squirrel away enough money to pay retiree health benefits and, perhaps most egregious, they increased their benefits without figuring out how to pay for them. Pew's $1 trillion figure -- tallied through the end of the 2008 fiscal year -- is conservative given that it doesn't capture the stock-market losses incurred in the second half of that year.

To help close the gap, some states are scaling back their retirement plans. According to Pew, 10 states have curbed benefits to new workers or raised the retirement age. Nevada, for instance, changed the formula used to calculate pension benefits for those hired after Jan. 1 to provide a lower payout. It also raised the retirement age for public workers from 60 to 62, starting this year. Another 10 states -- including Iowa, Nebraska and New Mexico -- boosted employee contributions.

Workers are also contributing more to the health-care plans they'll get once they exit the workforce. New state workers in Kentucky, for instance, must now put 1 percent more of their paychecks toward their retiree health plans.

The outlook is grim. "If pension systems continue on the course they've been on, the bite out of state budgets will get bigger," says Katherine Barrett, consultant to Pew. Unlike the federal government, which controls the printing presses and can run huge deficits, states must balance their budgets. For states with severe deficits, that could mean an increase in taxes, a reduction in public services or both.

-- Kiplinger's Personal Finance

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