Wednesday, June 22, 2011

Many states have modified their retirement benefits, but they’re passing on switch to DC plans

There is an easy way to shore up state pension systems, or so many leaders elected last year believed: States should move to offering 401(k)-style retirement plans. Eight new governors and numerous new legislators said they would support shifting state employees to these plans, following a move the private sector made long ago. Kansas, Kentucky, Nevada and Oklahoma appeared especially ready to make the change. 

But 401(k) fever seems to be over, at least for now. No state this year replaced its traditional fixed-benefit pension with a new plan in which employees set aside a portion of their pay and assume the risk in making investment decisions. Only one state, Indiana, implemented such a plan for new employees, but made it optional.   

Enthusiasm for the switch waned after consultants and legislative researchers told state officials that it would cost money before it saves money. That was a difficult sell at a time when many states faced their fourth consecutive year of big budget deficits.

The problem is that changing from a so-called “defined benefit” plan to a “defined contribution” plan comes with huge transactional costs. When the old plan is closed, the employees and retirees who remain in the plan still receive their pension checks even as the number of employees contributing to the plan drops — new hires contribute to the new plan. The state has to make up the difference. In Kentucky’s case, the increased cost would be $8 billion over 15 years. The Nevada price tag: $1.2 billion over the next two years. 

While the 401(k) boom never materialized in 2011, a number of states did pass sweeping changes intended to shore up their pension systems. Lawmakers in half of the states cut benefits for current and future state workers. Nine states increased pension contributions from current employees; Florida began requiring workers to chip in for the first time. Even North Dakota, the nation’s most financially sound state, asked current employees to contribute more to their plan. 

More changes are likely to pass still: Pension proposals are pending in nearly all of the 15 state legislatures that have yet to adjourn for the year. So despite the stalled momentum toward defined contribution plans, states for the third year in a row will reduce the amount of money that government pays its workers when they retire. The cuts signal a continuing shift in the way states view retirement benefits, reversing years of increases towards a system that is less generous to public employees.

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