We frequently hear the term “pension reform.” There is no standard definition of this term, and it can mean different things to different people. However, since the term is used so often, let’s see if we can shed some light on it.
Certainly the main thing pension reform refers to is some type or types of pension change, with the change or changes being aimed at public servants, that is, government workers. The change or reform is usually some kind of reduction in benefits, or an increase in costs paid by the worker, or both. People will have varying views of whether such changes are good or bad.
A non-government worker might see pension reform as a way to save taxes, and might see public employee retirements as too generous. A governmental employer might see pension reform as a way to save costs in a tight budget. The public employee would see reform as a takeaway of benefits earned or a reduction in compensation.
The tide pushing for pension reform continues to rise. In our ongoing weak economy, political leaders from both parties often cite pension reform as one way to help solve the financial ills of government employers. The news media have been sounding the siren of pension reform for quite awhile, albeit without much explanation or depth of understanding. In the recent June 5 elections, ballot measures which passed in San Diego and San Jose expressed those voters’ desire for pension cuts for their city workers. Governor Brown has proposed a pension reform package, and many other reforms are being considered in California and other states.
Pension reform can take many shapes. To get a flavor of the changes placed under the umbrella of pension reform, here are some that are often proposed. All of them result in savings for the government employer.
• Require employees to contribute more of their salaries toward retirement. The employer would then pay less.
• Shift employees from traditional pension plans into 401(k) plans, which are savings accounts, not pension plans. This could be done on a partial basis, creating a hybrid plan which is part traditional and part 401(k). The 401(k) plan offers a lower benefit and is cheaper for the employer.
• Place limits on the amount of pension that an employee can earn.
• When they are hired, increase the age of retirement for new employees and give them a lower level of retirement benefits than given to employees in the past.
An important question that must enter into any discussion of pension reform is: Who will or who can the changes affect? For purposes of pension reform, there are three groups of people to consider: retirees, current employees and future employees. At the risk of oversimplification, retirees have certain “vested” retirement benefits which they have earned and which legally can’t be reduced. Current employees also have certain vested benefits. However, future employees have no vested benefits; they will receive only what is offered to them at the time they are hired. Therefore, their retirement benefits can be lower and different than those of current employees and retirees.
Pension reform measures, as enacted by governmental bodies, legislation or voter approval, will inevitably give rise to questions about who is affected and how, and whether the reforms meet legal muster. Litigation will no doubt occur in search of answers. This is California, after all, and disputes frequently wind up in court.
We’ve heard a lot lately about pension reform, and we’ll be hearing a lot more. It’s impossible to know what the outcome of all the ideas, discussions and efforts will be. But changes seem to be on the horizon and perhaps this primer will help as we try to follow and understand the movement toward “pension reform.”