Lingering effects from the Great Recession have been taking hold on state coffers with nearly all states making changes to retirement plans. In many cases contribution rates have gone up and benefits have been reduced - sometimes by as much as 20%.
The results have seen many states increase the number of years included in their salary calculations, leaving some workers facing the reality that their pensions alone may not be able to carry them through their retirement years.
These findings come from a recent study by the Center for State and Local Government Excellence and the National Association of State Retirement Administrators.
According to the Effects of Pension Plan Changes on Retirement Security, pension reforms have reduced the retirement benefit new employees can expect compared to existing employees. Reductions, notes the report, range from less than one percent to as much as 20%.
Also, 21 states have increased the number of years included in the final average salary calculation, 12 states have reduced the "multiplier" used in the pension calculation and nine states have changed both of these variables.
Alex Brown, NASRA research manager, says when addressing both pre- and post-state changes, only the pension equation was considered for the purposes of the report (years of service x final salary x multiplier factor). Any state that reduced the multiplier within the pension equation saw their employees receive the steepest decline in benefits.
What stood out to me was that even under pre-reform conditions there are still, in some states, supplemental savings requirements for employees [on top of what is currently offered within the pension plan]. This reinforces the idea, which is lost in the narrative, that these state retirement systems have always been designed as a benefit that is supplemental to personal savings.
For example, a worker in the state of Alabama would need to save more than $202,000 (annuitized over 25 years) in the pre-reform environment, on top of already existing pension funds, to acquire 75% of his/her final salary. After the reforms took place, that same worker would need more than $350,000 in supplemental savings to reach the same level of retirement savings.
Hybrid defined benefit and defined contribution plans are beginning to be adopted as an alternative with five states having gone that route. According to the report, since 2009 four states have passed combination defined benefit/defined contribution hybrid plans for new employees while Rhode Island created a plan for both new and existing employees.
[Hybrid plans] have been growing in use since 2009, explains Brown. Plan design changes are under consideration in a few states, though the overall pace of pension reform has slowed as of this year, he adds. Prior rounds of reform and improving investment performance have alleviated some of the pressure felt by states after the financial crisis.
While states grapple with the restructuring of their plans by offering lower benefits, they are also considering how these actions affect morale. Some states are acting by making professional development and leadership training part of the perks employees can take advantage of. For example, the report cites Pennsylvanias development training geared towards management positions, and an emerging leaders training program as part of its offerings to employees. Tennessee created a chief learning officer role that looks after professional development and training.
Nevertheless, the conventional wisdom, according to Brown is that state workers will work longer to achieve similar, reduced or less certain retirement benefits as compared with those employees who were in legacy plans. These [state] plans were always designed to pair with other savings to provide employees with income in retirement, stresses Brown.
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