Center Summit Debates Widespread Changes to Retirement Plans


FOR IMMEDIATE RELEASE
April 24, 2013

FUTURE OF RETIREMENT SUMMIT
Widespread changes to retirement plans debated

WASHINGTON, DC – Aging workers and widespread changes to retirement plans challenge state and local governments.

Nationally recognized experts and practitioners gathered in Washington, DC, last week at the Future of Retirement Summit to examine how demographic, workforce, legal, financial, policy, and political challenges are changing local and state government retirement strategies.

The event was hosted by the Center for State and Local Government Excellence and moderated by Peter Harkness, founder and publisher emeritus of Governing magazine.

Center President and CEO Elizabeth Kellar opened the Summit on a cautiously optimistic note, pointing to the slowly brightening financial outlook for state and local governments as the economy recovers and stock market rises.

Kellar shared data from the Center’s annual survey of state and local government human resource professionals that measures workforce trends. The survey, which will be released next month, shows some improving conditions:

  • Pay freezes still top the list of workforce changes, with 33 percent of governments reporting them in 2013 compared with 51 percent in 2012.
  • Eighteen percent of respondents reported layoffs, down from 28 percent last year.
  • Staff development is the top human resources issue this year.

She noted that 44 states have made significant changes in their pension plans between 2009 and 2012 and that governments in 2013 still report a high rate of change to retirement and health plan benefits: 44 percent of survey respondents said their government made changes to retirement benefits this year, most commonly increasing employee contributions.

Speakers reminded the audience that cutting retirement benefits is not costless and that pension plans must be carefully designed to provide retirement security.  And while the rate of retirements from local and state governments is growing, so, too, is the list of skilled positions that are difficult to fill.

“You have a situation where we’re coming out of a period of pay and hiring freezes and governments need to hire workers, especially those with specific skill sets,” said Center Vice President of Research Joshua Franzel. “Governments are continuing to compete for talent with an ever-recovering private sector. You’re seeing rebounding government finances that might position these governments to be able to hire more, but at the same time the [cost of] benefits are crowding out their ability to pay competitive wages.”

Alicia Munnell, director of the Center for Retirement Research at Boston College, emphasized that public pensions are not as bad off as many assert.

“You have to be so careful to point out the heterogeneity of the outcomes,” she said, “because there’s an array of differences in the funded status, how well they’re managed, and the nature of benefits. We do have a lot of plans that are fairly well funded now, but we also have a lot that are poorly funded and they are going to be in trouble almost no matter what happens.”

She said that her estimates for 2011 (the most recent figures available) show that, even with the effects of the financial crisis, public pension plans are 75 percent funded. She emphasized that pension costs in 2010 were only 4.6 percent of state and local government budgets.

Her outlook is optimistic overall. “I don’t think of it as an area where we’re going to see failure after failure after failure. If anything, I’m hopeful that we’re working our way through it.”

She agreed with moderator Peter Harkness when he concluded that, with a few exceptions, “the ill health of public pension plans is greatly exaggerated.”

Robert Clark, Zelnak professor at the Poole College of Management, North Carolina State University, reviewed overall trends in public retirement plans. Although defined benefit (DB) plans still predominate in the public sector, after decades of increasing benefits, they are now retrenching through modifications and redesigns.

“Clearly there’s a one-way direction in these last 15 years that is continuing today,” said Clark, “increasing retirement ages, increasing vesting, and a variety of other things that make these plans less generous.”

He said there is a fundamental question about whether DB plans are right for every employee. Many states are saying “no,” but he cautioned that such changes have larger ramifications both for governments’ ability to hire and retain skilled employees and for taxpayers.

“We all believe that these plans affect worker decisions – attracting, retaining, motivating, and ultimately retiring workers. We all believe that the costs affect our tax rates. How do we put those together and think about that in an integrated system?”

The upshot? “Individuals, public employees, are going to look at the future and say, ‘I’ve got to take more and more responsibility for my own retirement income. I’d better think about how I’m going to do that.’”

Munnell added that as more governments introduce defined contribution (DC) plans or DB/DC hybrid plans, they must use the lessons learned in the private sector. “The evidence is pretty clear at this point that people do not accumulate very much in these plans,” she said. “They make [investment] mistakes, they don’t join, and they take out their money when they change jobs.”

It is critical that such plans in the public sector be well designed, since many public sector workers do not have Social Security to fall back on.

Steven Kreisberg, director of collective bargaining for the American Federation of State, County and Municipal Employees (AFSCME), suggested that the many public debates  can be a way to deflect public attention from the real issue: that a government may not have assets to cover its liabilities.

“It’s really about, how do we break promises to people?” he said. “A liability is nothing more than a promise. So when we reduce liabilities we’re talking about how can we break a promise? How can we do that legally under contract theory? And we rarely have discussions about the moral aspects of this. Because we don’t reach into people’s bank accounts and take money out. But for some reason it’s deemed acceptable to take people’s pension benefits — which they, in many cases in the public sector, paid for – at least paid for in part – but in all cases have earned by virtue of service.”

Louis Kosiba, executive director of the Illinois Municipal Retirement Fund (IMRF), pointed out that there are a number of factors that have led to IMRF’s 88 percent (market based) funded status:  an independent board of trustees, enforcement authority to collect employer contributions, a 7.5 percent investment assumption since 1992, and a sound actuarial approach. “We have a 100 percent funding goal,” he noted.

In a lively question and answer period, Robert Clark noted that workers with a short government career may leave with no retirement benefits other than their own contributions.  He added that there are unanswered questions about the decision many have made to raise the retirement age.  “If we raise the retirement age, they will stay.  Do we want that?”

Full video of the Summit and most of the PowerPoint presentations are posted on the Center’s website.

###

For more information: Amy Mayers, amayers@slge.org, 202-682-6102