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January 2012 Policy Study, Number 12-1

   

Iowa's Privileged Class: Time for a Change!

    Pension Reform Options
   

 

The recent reforms made to government pension plans addressing the shortfalls include changes for both future and current employees.


The five broad types of changes include “keeping up with funding requirements; reducing benefits or increasing the retirement age; sharing the risk with employees; increasing employee contributions; and improving governance and investment oversight.”[17]


According to the National Council of State Legislatures (NCSL), “Sixteen legislatures enacted increased employee contribution requirements in 2011 (compared with 11 states in 2010).” These changes included both current and new employees. In some cases, while employee contributions increased, employer or direct government contributions decreased.


“Fifteen legislatures increased age and service requirements for normal retirement.” In most cases the age was moved closer to 65 and the years of employment increased. Thirteen states have increased the vesting period requirements, generally from five or six years to eight or ten, according to NCSL.


Between 2010 and 2011, fourteen Legislatures increased the “high salary” periods used for determining benefits, generally from 36 months to 60 months. Florida made the greatest change, going to a
full eight years of salary consideration.


During the same period eighteen states changed their automatic Cost of Living Adjustment (COLA) provisions.[18]


Another reform option, which has been widely adopted by the private sector, is switching from a Defined
Benefit to a Defined Contribution plan, or a combination of both.

 

The National Institute on Retirement Security issued a report in September 2011 stating that currently 10 states offer employees either a choice of Defined Benefit/Defined Contribution (DB/DC) or a Defined Contribution (DC) plan only.

 

Those states are Alaska, Colorado, Florida, Montana, North Dakota, Ohio, Oregon, South Carolina, Utah, and Washington.[19] According to their analysis, as of 2008, nationally there were 14.7 million current state and local government employees receiving DB pensions.


In 2008, over 84 percent of government workers with retirement plans had a DB plan, and two-thirds of workers had access to multiple options within those plans.[20]


The DB retirement system is “pre-funded” and is supposed to offer a “predictable” monthly benefit for the employee’s entire life after retirement.

 

The benefit is based on a percentage of income earned by the employee, and is based on a combination of factors including the income earned in the last three to five years of their employment, or their “high” three to five years of earnings, length of employment, and age at retirement.[21]

 

Many policy analysts argue that the increasing unionization of the government workforce has been a key factor in the continuation and growth of these benefit plans. The research done by Boston College seems to indicate that while unionization has an impact on increasing salaries, as this is a negotiated or bargained item, there is less impact on pensions – which are generally determined by state Legislatures.[22]

 

In either case, it is important to recognize that the contributions to these plans primarily come from state taxes paid by private-sector workers.

 

In some cases, but not all, government employees make contributions to their own DB plan, but the majority of the contributions come directly from government, via the taxpayers, in addition to the salary earned by the worker.

 

The most controversial changes to government-worker retirement plans in 2011 occurred in Ohio and Wisconsin, where new Governors proposed and made significant changes to the current systems. The Ohio changes were cancelled by a statewide vote, while in Wisconsin there is an attempt to recall the Governor as a result of pension reforms.

 

   

 

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