Are state pension plan fixes breaking retirement promises?

In early July, I told you how lawmakers have consistently overpromised and underdelivered when it comes to retirement plans for state and local government workers. And why, in doing so, they’ve only heaped another level of burden on our entire nation’s already-fragile financial picture.

But according to data compiled for the recent Bloomberg Cities and Debt Briefing held in New York last week, the situation just keeps deteriorating:

Less than half of state retirement systems had enough assets to pay even 80 percent of the benefits they’ve already promised!

Now, politicians are rushing to “fix” their past mistakes, and the situation is getting downright ugly.

Take New Jersey, for example.

According to Bloomberg, the state’s plan currently ranks number 11 on the list of most underfunded pension systems.

And as you might recall from my previous article, recent estimates have said New Jersey’s plan will run out of money in 2019 … IF the state manages to get an annual investment return of eight percent! With a lower return, the fund may last only five more years.

That’s why, last week, Governor Chris Christie announced his latest proposal to reform the state’s public pension and health care system.

New Jersey has already reduced benefits for new state hires, but Governor Christie’s latest proposal is far more dramatic. Some of the measures he’s suggesting:

• Reverse a nine percent benefit increase that was enacted in 2001
• Raise the state’s retirement age to 65, and allow early retirement after 30 years of service vs. 25 currently
• Ask teachers and government workers to kick in 30 percent of their health insurance costs from about eight percent now — with the increases stepping up over a four-year period
• Lower the state’s assumed investment return from a current 8.25 percent to 7.5 percent
• And halt cost-of-living adjustments for current retirees until the state can afford to pay them

Personally, I wonder if a 7.5 percent annual return is still too aggressive given today’s investing climate and how conservatively a pension fund should be invested.

But regardless of where you stand on each of the proposed moves, they prove that even CURRENT retirees’ benefits aren’t necessarily guaranteed in these crazy times.

Consider the Pension Court Battle
Happening in Minnesota Right Now …

So far this year, sixteen states have overhauled their pension plans. Three of them — Minnesota, Colorado, and South Dakota — have also gone so far as to trim the cost of living adjustments for current pensioners … just as Governor Christie is now proposing.

Those legislative efforts are currently being challenged in the courts, with Minnesota’s getting to a judge first.

Last Wednesday, the plaintiffs were granted a request for additional time for discovery … so the outcome is still up in the air.

But make no mistake: This case is being watched by hundreds of thousands of retirees and politicians around the nation.

Retirees from New Jersey to Minnesota are up in arms over proposed changes to their state pension plans.

In the meantime, Minnesota retirees are left with quotes like the following, from the state’s Assistant Attorney General Rita Coyle DeMueles …

Arguing that Minnesota has the right to modify benefits being paid to pensioners, she said, “There is no contract here, express or implied.”

Many of the folks who thought their retirement benefits were guaranteed may be surprised to hear that!

Moreover, all of these state pension woes and attempted clawbacks make me wonder whether we will soon be hearing the same debate at the national level — over our entire Social Security system.

Already, there are indications that lawmakers are working behind the scenes to close off certain options that are currently available to retirees! [Editor's note: For more on this, and Nilus' recommendations on what to do for your own retirement, click here.]

And can anyone say that Social Security is any more fundamentally sound than these state pensions? Or that its promises are any more guaranteed?

Scary stuff, indeed.

Best wishes,

Nilus

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