State and local pensions are a retirement planning risk for both taxpayers and public employees. In many locales, the money to pay for these promised retirement plans appears to be alarmingly inadequate. And there are some instances where the amount of the pension promise is much higher than many people think is reasonable under any circumstance, given the tough economic times.
Alicia Munnell, director of the Center for Retirement Research at Boston College and author of a new book "State and Local Pensions: What Now?", offers a thorough but rational analysis of the extent of the public pension problem and some solutions.
In her conclusions, she points out three things to remember for those of us who live in communities and states where the problems are getting a lot of public attention.
- The average public pension benefit in 2010 was only $24,000. There are some astoundingly high exceptions, she acknowledges, but most public employees aren't retiring in luxury. One-third of them aren't entitled to Social Security, so the public pension they receive is all they get.
- Most public plans are in reasonably good shape. Munnell says they were close to full funding before the dot-com bubble burst in 2000, and then they were hit again by the financial collapse in 2008. "As long as we don't have another financial crisis very soon, there is every indication that these plans will increase their funded ratios as the economy and stock market recover," she says.
- Cutting pensions for new public workers is a questionable plan. It could make recruitment of talented people difficult because good benefits is the tradeoff public employees make for lower salaries. "These are the people who are going to teach our children, who are going to run our emergency systems. We want good people doing that," Munnell says.
There are two things Munnell would do.
Raise the retirement age. "Yes, there are people with very physical jobs who can't keep working, but for the vast majority of Americans, the way to square the circle is to work longer," Munnell says.
Share the sacrifice. Assess taxpayers more and expect workers to give up something, too, including going to court, if necessary, to reduce future benefits for current workers. In some states, such reductions appear to be against the law, but Munnell thinks the interpretation of these laws should be re-examined.
The bottom line, she concludes, is to improve all retirement systems so people with inadequate pensions don't have "pension envy."
"The private sector has an inadequate retirement system. It is too small and too risky. ... No matter what reforms are made in state and local plans, pressure to cut benefits will continue as long as public plans provide more generous benefits than the private sector plans."