August 6, 2012 (PLANSPONSOR.com) – Legal constraints make it difficult for public pension plans to adjust to changing economic and demographic conditions, a report contends.
An issue brief released by the Center for State and Local Government Excellence points out that most states protect pensions under a contracts-based approach, which prohibits a state from passing any law that impairs existing public or private contracts. There are currently a number of lawsuits against states that have attempted to reform public pensions by changing the benefits retirees will receive or the amount of contributions employees will make into their retirement funds (see “Unions Challenge R.I. Pension Changes with Lawsuits”).
Report authors Alicia H. Munnell and Laura Quinby of the Center for Retirement Research at Boston College say the protection of future accruals of core benefits serves to lock in any benefit expansions, limiting policymakers’ ability to respond to changing economic conditions, but future benefits, much like future payroll, should be allowed to vary based on economic conditions. That is, public officials should be able to change future benefits for current workers. Such increased flexibility for public employers would accord their employees the same protections as workers in the private sector, the report says. The Employee Retirement Income Security Act (ERISA), which governs private pensions, protects accrued benefits but allows employers to change the terms going forward.