Save the Pensions: No Sudden Moves, Please

That’s a question we’re going to be asking a lot as states wrestle with growing pension obligations that weren’t properly funded. Illinois courts have just ruled that the state’s attempt to curtail its pension benefits cannot go forward. The Chicago Tribune boils it down: ”In its ruling, the court restated that state worker retirement benefits that are promised on the first day of work cannot be later reduced during their term of employment, only increased.”

That probably sounds reasonable to a lot of readers; after all, employers shouldn’t be allowed to renege on pay promises (except in bankruptcy). But Jane the Actuary, a frequent commenter here, argues that what should actually be at stake is not benefits that have already been accrued for past work, but those that will be earned in exchange for future work. Private employers are not allowed to take back benefits you already earned, and governments shouldn’t do this either. But private employers can tell you that the pension fund is closed and you won’t accrue any further benefits, or that benefits accrued in the future will be smaller. Should governments be able to do this too?

There are a few issues that we need to unpack here. The first is what, exactly, we owe to workers who have been at it a long time. Pensions are another form of compensation, like health care benefits or wages. But they’re a strange form of compensation, because they’re so heavily back-loaded. That can have benefits for both employer and employee (for example, in reducing turnover). But it also has very high costs. They reduce the mobility of workers, and can make a mid-career job loss catastrophic. Meanwhile, they create enormous difficulties for any employer who sees a shortfall in the pension just when the employer itself has fallen on hard times — as is apt to happen during a bad recession. The problems are even worse for states and local governments than for businesses. Many of the public pensions used lax accounting standards to hand out generous benefits far in excess of what their accrued investments will support.