Public pensions are not safe.Providence, Rhode Island, has embarked on a high-profile round of cuts to public employee pension plans, and voters in the much larger cities of San Diego and San Jose both passed referendums last week to do the same. But other municipalities, whose elected officials fear blowback from public employee unions or older voters, are finding subtler methods to cut costs.Pensions and Investments reports that pension managers across the country are tinkering with their plans’ cost of living adjustments (COLAs) to put them on a stronger footing. COLAs are supposed to compensate pensioners for the rate of inflation and tend to rise by a relatively high amount. Decreasing the size and frequency of COLAs can save some much-needed cash, now that funds are drying up:
One of the richest COLAs, offered by 10 states, is an automatic 3% boost compounded on the accrued benefit. That can add 26% to a plan’s benefits cost, according to an analysis by Gabriel Roeder Smith & Co., an actuarial and pension consulting firm. Even a modest 1% COLA can add 7% to total costs, according to the analysis.That makes COLAs ripe for cost-cutting. That was the case in South Dakota, where a previously automatic 3.1% COLA that had to be prefunded accounted for 25% of present benefit costs. “That’s $2 billion that we knew were out there,” said Robert A. Wylie, executive director/administrator of the $8 billion South Dakota Retirement System, Pierre, in an interview. “It is a huge leverage on the overall cost of the plan, and people don’t recognize that.”
These cuts may not be a game-changer in the short term, but over time they will add up to a substantial reduction in benefits. And unlike the direct cuts Providence made, they’re politically easier because they have a more gradual impact.In one form or another, however, cuts will come, given the huge shortfalls in pension systems around the country. The message to public employees and other recipients of defined-benefit pensions is clear: You need to start saving extra money now for protection from the inevitable cutbacks. In the meantime, politicians will tell you things are perfectly fine for as long as possible. Don’t believe them. They are lying through their teeth.