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States Start to Chip Away at Retirement Benefits

The Greek government's move earlier this month to scale back its generous pension benefits as a condition of a Euro-zone bailout is shaping up as a "coming attraction" of what we're about to see across the United States. Cash-strapped states are beginning to scale back public-employee retirement benefits to address their fiscal woes.

Last week, Michigan enacted new pension legislation that requires current public sector public school employees to contribute 3 percent of their salaries into a health care trust - in addition to what they already contribute to the pension system - to help defray the cost of the plan's medical payouts to current retirees. And new employees will be cordoned off into a less generous retirement plan that is a hybrid of a traditional pension and a 401(k).

In New Jersey, legislation went into effect last week that requires police and firefighters to contribute 1.5 percent of their salary toward their health care benefits, a move that is expected to save local governments' more than $300 million a year. New hires will also be enrolled in a less generous pension plan than current New Jersey employees. That move will help future funding issues, but will not help solve the state's current $40 billion-plus pension-funding shortfall.

And in the big kahuna of cash-strapped states, California, pension costs (and reform) are moving front and center. Last week the nation's largest public pension fund, the California Public Employees' Retirement System (Calpers) started the ball rolling on asking the state of California to increase its annual contribution into Calpers by a mere 18 percent or so ($600 million.) This in a state so broke its FICO credit score wouldn't reach 580. Calpers has since agreed to hold back on the request while the state continues its dysfunctional dance toward addressing its massive deficit. One reform gaining momentum is to push new state employees into a less generous pension plan, a la Michigan and New Jersey.

With an estimated $1 trillion public pension gap between what states have promised to pay out in retirement benefits and what they have set aside to cover those costs, this is just the beginning of the end of the age of public pension envy.
In a recent online debate at the New York Times over whether states can plug their pension holes Northwestern University business school professor Joshua Rauh estimates that as many as 20 states could see their pension funds run dry by 2025; and that was assuming a rather generous 8 percent return on their investments.

It's pretty clear that one of the reforms more states will impose is to push new workers into 401(k)-like retirement plans. Here's to hoping that those new plans aren't as flawed as the private-sector 401(k) model. A recent post by fellow MoneyWatch blogger Allan Roth on the merits of the federal Thrift Savings Plan should be required reading for any state lawmaker considering adding a 401(k) feature to public retirement plans. As Roth explains, the TSP is the very model of a 401(k) that gets it right; from low costs to a manageable number of investment options. Moving new employees into the age of the 401(k) won't solve the current pension shortfalls crippling so many state governments. But at the very least, the states should learn from the numerous mistakes made by private-sector 401(k) plan sponsors and build a better retirement plan for public employees.

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