A recent report from the Center for Retirement Research at Boston College looked at state and local pension plans and whether there had been changes to those plans since the financial crisis. The report’s authors found that three-fourths of state pension plans and more than half of local pension plans had made changes since 2009. While the majority of changes affect future employees only, a quarter of plan changes in both state and local plans affect current employees. What this report shows is what we’ve known for several years now: despite making changes, cities and states are maintaining their defined benefit pension plans.
The most common changes affecting current employees were an increase in the employee contribution and a change to the Cost of Living Adjustment (COLA). Due to constitutional and legal protections, increasing the employee contribution or reducing the COLA for current employees are generally more permissible changes than outright benefit reductions.
For future employees, the changes were more varied. The most common change was to increase the age or length of service required in order to claim the pension benefit. Changes for future employees also included increasing the number of years used in a final average salary calculation and altering the benefit multiplier used to calculate the pension benefit. Even for new hires, few plans changed to either a defined contribution or hybrid plan design.
As this report shows, many cities and states made changes to their public pension plans after the financial crisis to strengthen the long-term stability of the pension systems. It’s important to note that the overwhelming majority of these cities and states did not change the basic plan design of a defined benefit pension. They know a pension provides the best retirement security and they want it to work for retired, current, and future employees. Additionally, last year we saw cities and states expand access to pensions. The city of Palm Beach, FL in 2016 moved back to a defined benefit plan for its public safety employees and the state of Wisconsin expanded access to its successful public pension system for municipalities. Cities and states recognize the value of defined benefit pensions and they are sticking with them.