State Pension Debate: Black, White & A Whole Lot of Grey
It comes as almost no surprise that states governments are getting hit in their pocketbooks throughout the recession just as everyone else is. The difference is, state governments often have a lot more people that they need to write checks to. One of these checks that has been given a lot of attention lately is the retirement plans for government workers, and it’s no secret that state and local governments are looking for ways to reduce the number the write in the dollar amount section.
According to statistics from The National Conference of State Legislatures, 43 states have changed their retirement plans since 2009 in hopes of finding that ever elusive balance for their budget. Many states have taken different approaches to that task, implementing plans that increase the amount of money that workers contribute to their retirement, increasing the age in which benefits can be reaped and more. These changes have put a bad taste in the mouths of most public employees who have stood behind the shield of laws that protect their pensions as these battles continue to fill our courtrooms with various appeals and challenges.
It’s a messy issue that is causing upheaval in nearly every state, flooding local news outlets with protests, sit ins and even a Governor’s recall election or two. Like any heavily involved controversy, it isn’t black and white. The shades of grey hovering over this issue are more numerous than many people realize, or want to try wrap their heads around.
First of all, many of the changes (or proposed changes) do not have any effect on current workers who have spent their lives in a job planning for the benefits to come after retirement. Most people accepted government jobs, many times with lower pay than the private sector, because of the shining light of their pensions at the end of the long tunnel of employment. Of course, there are a few states, such as Louisiana and Florida, which are asking (or in other words, are attempting to make a state law requiring) current employees to contribute more to their retirement funds but these laws are facing the most stiff defense from labor groups and unions. With the exception of a few cases, the changes in pension policies will affect only those who are hired after the legislation passes.
Something else that most private sector employees don’t take into account in these battles is the soft little pillow we like to call Social Security. Many employees who are covered by a public retirement pension program, a program that they are now at risk of losing, are not covered by Social Security. When the Social Security system was created it didn’t include any public sector employees. This changed after many states made what are called “Section 218 agreements” with the Social Security Administration to give their employees some coverage under the federal program. Later, a 1991 federal law gave Social Security coverage to any public employee that weren’t involved in the Section 218 agreements or didn’t have pension programs through their agency. So although times have changed, many employees rely on their pension programs to fill in for their lack of Social Security benefits. They don’t have the safety net waiting to catch them in the end, because they have spent their lives in a system that was supposed to replace that.
One aspect of this controversy that seems to be the most transparent, but most obvious shade of grey is the simple fact that state governments are, at their roots, a business. When private sector businesses can’t cover the expense of their employees, they cut costs, lay people off, or in the worst cases, go out of business. Well state governments can’t shut down, for obvious reasons. They can’t fire all their workers, again, for obvious reasons. Their only choice is to cut costs. Like any business, state and local governments have a balance sheet, with liabilities and assets, and there are new accounting rules which will change how those will be calculated. With many states lacking the assets needed to cover their employee retirement programs, some missing over 70% of the necessary funds, they are not looking very valuable to Mr. Moody and his ratings for investors. If states can’t find a way to cut their deficit, many investors will begin to expect a higher yield to make up for the higher risk and lower ratings, which will add further costs to the government. With all of the emotions involved in the fiery battles around the nation, the bottom line for many states is simply, “It’s not personal, it’s business.”
Overall, the battle over state pensions involves both the worker’s money and their future and there are few things life that people fight harder to protect than that. The problem is that the states are fighting for the same two things. This dispute over worker pensions is a sea of grey in a dizzying world of passionate black and white. Round and round with the issues we go, where we will stop, nobody knows.