Effects of Pension Plan Changes on Retirement Security

April, 2014

This report was prepared by the research teams of the:

Center for State and Local Government Excellence: Danielle Miller Wagner, Joshua Franzel, Elizabeth Kellar, Amy Mayers, and Bonnie Faulk

National Association of State Retirement Administrators: Alex Brown, Keith Brainard, Jeannine Markoe Raymond, Dana Bilyeu, and Ady Dewey

Introduction

Since 2009, fiscal constraints have forced state governments to reduce costs, often by laying off or furloughing employees, imposing salary freezes and/or reducing benefits. In fact, according to the National Conference of State Legislatures, since 2009, more than 45 states have made significant changes to their retirement plans, including increasing employee contributions, reducing benefits, or both. Other states have modified their plan design, choosing to transfer more of the risk associated with providing retirement benefits from the state and its political subdivisions to its employees.

While we know a great deal about the unfunded liabilities of public pension plans, we know little about the effects pension plan changes will have on the retirement income of public employees.

This report calculates the retirement income state and participating local employees hired under the new benefit conditions may expect, and compares it with the retirement income they would have earned before the plan was changed. The report also summarizes interviews conducted with state human resource executives and retirement experts from 10 states that have made significant pension plan changes.

Key findings

• Pension reforms reduced the amount of retirement income new employees can expect to receive compared with that of existing employees. Reductions ranged from less than 1 percent to 20 percent.

• New employees can expect to work longer and save more to reach the benefit level of previously hired employees.

• Hybrid plans adopted in five states produce a wide range of retirement incomes. The Rhode Island, Tennessee, and Utah plans may increase retirement income, a fact that can be partially attributed to higher required contributions to their defined contribution plan. Georgia and Virginia have lower statutory contribution rates and their hybrid plans may produce lower retirement incomes.

• Changes to retirement plans include an increase in the number of years included in the final average salary calculation (21 states); a reduction in the multiplier (12 states); and a change to both of these variables (nine states).

Although newly hired employees will need to work longer or save more to have the level of retirement benefit that employees previously earned, state human resource officials say that wage stagnation and the increased cost of benefits for employees is a more immediate concern. To address the savings gap, many plan administrators are providing enhanced financial education and sponsoring and promoting supplemental savings opportunities.

Reasons for the recent wave of state pension reforms are numerous and usually are unique to each state, its finances, and its workforce. In most cases, the primary objectives have been to reduce the costs of providing retirement benefits and to transfer a greater portion of the associated risks from employers to employees. This study does not address the rationale for modifications, but instead analyzes the effects of the resulting changes at the individual employee level by

1) measuring how recent reforms affect the retirement income that will be provided to state employees who are hired under new benefit conditions; and

2) looking at human resource measures states have taken to directly or indirectly address the impacts of pension reform.

The Center for State and Local Government Excellence gratefully acknowledges the financial support from AARP to undertake this research project.

Read ... Full Report Including Hawaii Analysis