Legal Constraints Hurt Public Pensions’ Adaptability

August 6, 2012 ( – 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.

The authors point out that for most states, the challenge is to narrow the definition of the contract -- a burden that would fall on the legislature and the courts. First, enacting legislation that the contract is created when the employee performs the service, would establish an ERISA-type standard.  Second, if this legislation is challenged, the courts would then need to be persuaded to adopt a more flexible standard in light of changed conditions.  

Some states have taken the first step by passing legislation that reduces core benefits for current workers, but the courts have yet to rule on the legality of these changes.   

“A failure to permit such changes, however, would have serious consequences,” the report authors contend. They note that limiting pension reductions to new workers reduces pension costs only slowly over time, exempting current workers from cuts creates a two-tiered compensation system under which workers doing similar jobs would receive different amounts based solely on when they were hired, and allowing public employees to enjoy greater protections than their private-sector counterparts is perceived by many as unfair.  

The issue brief is here.