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Are public sector pensions broken?

Retirement Realities » Are public sector pensions broken?

The battles in Wisconsin and Ohio between public employees who have guaranteed, often inflation-indexed pensions and taxpayers who lack such generous and dependable retirement benefits could soon boil over into other states.

The frustration and anger behind this conflict isn't hard to understand, no matter where you stand on the issue. Taxpayers hit by joblessness and declining wages are being asked to accept higher taxes and fewer services, in part because of unfunded public employee pension demands. These bills are coming due at the same time workers in the private sector are facing retirement -- often without enough savings or a dependable pension plan of their own.

On the other side of the table are public employees who argue that they have been promised these benefits and are counting on them. They also point out that while public service jobs are generally dependable, they are rarely high-paying, and generous pension benefits have always been the carrot that keeps good workers on the job.

The pension deficit

No matter what side you are on, the shortfall appears daunting. Pew Center on the States, a research and public policy initiative, released a report in 2010 estimating a $1 trillion gap as of 2008 between what public workers have been promised in pensions, health care and other retirement benefits and the money put aside or otherwise available to pay those obligations.

Some economists say part of the problem will disappear when the economy recovers and baby boomers die off, but others argue that Pew is underestimating the gap and no matter how much the economy improves and how many people are no longer collecting, it won't be enough to pay public pensioners all that they are owed.

"Municipalities have made promises they can't keep," says Jonathan Bergman, vice president of Palisades Hudson Financial Group in Scarsdale, N.Y. "There isn't enough money to perpetuate the system. What I think will eventually happen is that cost-of-living adjustments embedded in plans will be reduced or eliminated."

Changes afoot in pension policy

In some parts of the country, beleaguered taxpayers are already attempting to renege on the promises made to teachers, police and firefighters.

In a handful of states -- Colorado was first -- legislators are trimming cost-of-living adjustments for current retirees. Affected retired and soon-to-retire public employees have joined together to sue, and the courts are still deciding whether the states have to pay up.

Meanwhile, officials in Wisconsin and Ohio recently made headlines by attempting to end collective bargaining rights for public employee unions -- a controversial step that some opponents consider morally offensive.

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In many other locales, officials are quietly creating tiered benefit systems, leaving the obligations to current retirees and soon-to-retire workers untouched while replacing traditional pensions with 403(b) plans for new and non-union employees. And in still other places, public sector workers are being asked to fork over a portion of their earnings toward their pensions.

"It's nerve-wracking," says Ann Fickel, director of legislation for the Texas Classroom Teachers Association. "It makes us especially nervous that we don't have Social Security to rely on either."

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