Rhode Island Officials, Unions Agree on Pension Fix – WSJ.com

2014

Did you ever wonder why public employee pensions are “contracts” (sometimes part of state constitutions) often contain generous COLAs, are frequently allowed to remain seriously underfunded for years … and private employer pensions are not?

Note the last paragraph below.

The wrangling shows it is often “extraordinarily hard” to change future benefits for current employees, Alicia Munnell, the director of the Center for Retirement Research at Boston College, said before the announcement. Rhode Island’s law took effect in 2012.

Public pension funds struggled during two recent recessions, although they are recovering. Some blame years of overly generous benefits for unionized workers, and others look to accounting assumptions that made plans appear healthier than they were.

Rhode Island’s law affected 66,000 active and retired public workers and immediately cut the state’s unfunded pension liability from $7.3 billion to $4.1 billion.

The law raised retirement ages for most employees to a high of 67 and shifted workers from a defined benefit plan into a hybrid pension-401(k)-style plan. It also suspended automatic annual cost-of-living adjustments. Workers were set to receive increases every five years until the pension system was at least 80% funded—estimated to take 14 years or more. COLAs were linked to the performance of the fund.

The proposed deal would give employees a 2% COLA after the legislation is passed and then one every four years until the system is 80% funded. The increases would be pegged to a mix of the fund performance and the Consumer Price Index.

Retirement age was restored to 65 for workers employed as of June 30, 2012, after 30 years of service.

Before the law passed, 58% of retired teachers and 48% of retired state employees—among those age 65 and over with 30 years of service—were earning as much or more from pension benefits than they had earned while working, according to the state, which said COLAs accounted for 45% of the unfunded liability.

via Rhode Island Officials, Unions Agree on Pension Fix – WSJ.com.