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Attack on Public Pension Plans
American Federation of State, Federal and Municipal Employees Retiree Newsletter
Summer-Fall 2005
Social Security isn't the only retirement system that could be changed from one that pays reliable monthly benefits to one based on risky private investment accounts. Across the country efforts are underway to do the very same thing to state and local government pension plans. In the last year, legislatures in states such as California, Alaska, South Carolina, New Mexico, Rhode Island and Minnesota have considered making major changes to traditional pensions.
Here's a sample of what's going on:
CALIFORNIA: Early this year, Gov. Arnold Schwarzenegger (R) announced his plan to replace the state's traditional "defined benefit" (DB) pension plans with "defined contribution" (DC) plans in which employees depend on individual investment accounts instead of guaranteed retirement benefits. He said that if the legislature wouldn't pass a bill to put all new hires into the new system, he'd put the issue on the November ballot. Although the governor suffered a setback with the public when AFSCME and other unions showed how his plan would decimate survivor and disability benefits, he hasn't given up. Schwarzenegger says he'll revise the plan and reintroduce it soon.
ALASKA: After a contentious battle between the state House and Senate, and between Democrats and Republicans in each chamber, the Alaska legislature passed a bill during a special session in May that replaces its DB plans for public employees with DC private account plans. In doing so, the legislature ignored a law requiring an impact study before it can make any major changes in the retirement system.
RHODE ISLAND: In January, Gov. Donald Carcieri (R) suggested major pension reforms, including privatizing the state's DB plans. AFSCME and other unions managed to head off such plans by reluctantly announcing measures of our own to reduce costs, such as establishing eligibility restrictions for new hires and refinancing pension-fund debt. But the unions stood firm against privatization and beat back efforts to cut state retirees' 3-percent annual cost-of-living adjustment (COLA).
Some states have already adopted DC plans as a voluntary alternative to DB pensions. But in each case, public employees sensed the risk of switching to private accounts. Florida, for example, borrowed $40 million from the state's traditional pension plan to set up a privatized system a few years ago. But since then, only 7 percent of the workers have chosen the new DC plan.
RECOGNIZING RISK. Similarly, since Michigan established its voluntary private accounts plan in 1997, only 3,000 out of 57,000 workers have signed up. In Ohio, a voluntary program started in 2001 has signed up only 5 percent of the public workforce for private accounts. The same goes for Montana, where 600 state workers out of 30,000 took the private account option.
According to Rich Ferlauto, AFSCME's director of Pension Investment Policy, "States that claim DB plans cost too much are exaggerating plans' financial problems." Ferlauto says the real reason for the move to DC plans is political.
"Large public pension plans own millions in corporate stocks - investments that help fund pension benefits. To protect these investments, the plans exercise their shareholder rights by monitoring corporate actions, such as CEO pay. So it's no wonder companies want to eliminate public plans and are appealing to politicians to help them."
ATTACK ON LABOR. "It's an attack on labor," says President Gerald W. McEntee. "Our members are the participants and trustees of DB plans that own billions in stock. That's power that our enemies don't want us to have. They see privatization as another way to reduce the effectiveness of unions."
While these attacks on public pension plans are designed to affect current workers and new hires, they can also hurt retirees. If a DB pension plan is changed to a DC plan, it will mean less money coming into the DB plan to fund current retirement benefits. In the future, that could mean cuts in COLAs and retiree health care.
AFSCME sees more attacks coming down the road and is preparing a campaign to defend the pension security of public employees and retirees.
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