This article first appeared in the St. Louis Beacon, May 16, 2012 - Listen to Illinois Gov. Pat Quinn and St. Louis Mayor Francis Slay and you'll soon hear about the burden of pensions.
Since Americans are living longer, pensions focus more significantly in their lives. Social Security is an important component of the retirement scheme but that program alone cannot ensure a middle class lifestyle. Not all employers offer pension plans to their employees but most governmental employers do.
These public pensions have come under a great deal of scrutiny recently because of state and local governments’ difficulty in paying the obligations incurred over so many decades. The fiscally caused Great Recession that the country is still working out of devastated portfolio holdings — at least temporarily — and drastically cut state and local revenues.
Historically, generous public-sector pensions had been a tradeoff for salary structures that were not as generous as those provided by private employers. Public workers had greater security while working and in retirement than private counterparts but less money in each paycheck. Nowhere is this more true than for those in the protective services: police and fire.
Police officers and firefighters have difficult jobs that often include danger. Each time they go out on a call, risk is involved. Often their pensions have been separate from general employees and more lucrative. Similar to the military, they are often eligible for full pensions after 20 or 25 years of service, regardless of their age. Public pensions have also generally been more secure. Unlike private companies that may go out of business (costing their workers their pensions), cities and states do not go out of business.
Until the last few years, pensions for state and local government employees have been defined benefit plans. This means that the employer contributes a certain percentage of the employee’s salary to the fund each check. Often the employee contributes as well although this has not been the case for many public employees in St. Louis or Missouri. A pension based on years of service, age and average salary results
On the other hand, the private sector, by and large, has offered a defined contribution plan. The employer provides a certain percentage of salary to what amounts to a 401K plan and the employee can make a similar or larger contribution. This results in an individual retirement account with no guaranteed pension amount. What the employee eventually receives is subject to the vicissitudes of the stock market and other portfolios where a large share of the funds is often invested.
Defined contribution is less costly to employers; and state and local government are looking at this system with considerable interest. States such as Wisconsin, Ohio and New Jersey have taken action to substantially lower their pension costs, and cities are also doing the same.
Slay has sponsored bills to bring firefighters’ pensions in-house from state control and to adjust those pensions, particularly for new employees but for some existing staff as well. The mayor estimates that firefighter pensions alone will cost $94 million a year. Firefighters whose union, Local 73, has long enjoyed considerable political clout, object to changes to pensions now and in the future. The political battle is underway.
The straitened budgetary circumstances of states and cities since the 2008 fiscal crisis have placed greater attention on employee pensions, their computation and their cost. Pensions had often been under the radar for most citizens and voters. The security tradeoff had been assumed and not generally questioned. Since state and local governments must have balanced budgets, the revenue losses beginning in 2008 have brought pension generosity into question on many fronts.
An example is the University of Missouri system. Its salaries were ranked last in the Big 12, but its benefits were at the median. Under the system when I worked there, faculty and staff made no contribution to its defined benefits pension system. Over the past several years, however, notable changes have occurred.
All university employees now contribute 1 percent of their salary up to $50,000 and 2 percent over $50,000 to the pension fund. For them, it remains a defined benefit system. Beginning in October of this year, a hybrid system of defined benefits and contributions will be introduced for new employees.
Vesting will continue to occur after five years. Employees will still contribute 1-2 percent of salary. The university will lower its contribution for new employees into a new hybrid plan that includes a match to the defined contribution part of the plan.
The university’s change is a mild one, as it only affects new employees. But changes elsewhere are affecting pension recipients and current employees.
The security of public employee pensions has become more tenuous in the face of a very severe economic downturn. In a climate that looks askance on tax increases, benefit cutbacks have become a new way of coping for state and local governments.
Lana Stein is a professor emerita of political science at the University of Missouri at St. Louis.