illustration by Normand Cousineau

You've worked hard.  You've paid into the system.  And now you have to fight to keep your pension.

Is your retirement secure? That’s a loaded question these days.

When it comes to retirement income, “financial planners talk about a three-legged stool: Social Security, defined-benefit pensions and personal savings,” says Robert Fisher, a retired New York State Public Employees Federation (PEF) member. “You can’t really count on any one of them to be adequate.”

Unfortunately, efforts are under way at all levels of government to saw off two of the stool’s three legs. Movements are afoot in local and state governments to do away with defined-benefit pension plans for their employees; and the Bush administration, although it has retreated for now, considers Social Security privatization one of its legacy priorities.

Whether you are in your 20s or in your 50s, you have a vested interest in the outcome of these debates, which will determine whether you have a steady stream of income during your golden years or a pool of money that fluctuates with Wall Street’s ups and downs.

“If I didn’t have a defined benefit, I couldn’t have retired,” says Fisher, who retired in March 2003 after working for the state for more than 30 years. “I took a bath in red ink” when the stock market tanked in the early 2000s. He and his wife, whose savings was largely invested in the market, lost about one-third the value of their assets between 2000 and 2003.

Pension politics: The bait and switch
President Bush’s Social Security privatization road show wound up at a dead end last year. Unfortunately, efforts at the state and local levels to change retirement systems for public employees are moving full speed ahead.

At the center of the debate is money. The financial services industry wants to get its hands on the $2 trillion in public pension assets. Accommodating governors, mayors and legislators are all too willing to help.

Instead of addressing the problem, which was caused in part by missed employer payments and three consecutive years of negative stock market returns, some policymakers in state capitols and city halls want to overhaul the plans. They want to replace defined-benefit plans, which guarantee workers a liftetime benefit similar to Social Security, with defined-contribution plans that are similar to private savings accounts.

An equally salient distinction between defined-benefit plans and defined-contribution plans is that defined-benefit plans are managed by financial experts and defined-contribution plans are managed by individuals—the workers.

Most public pension plans are well funded—close to 90 percent—according to a recent survey by the National Association of State Retirement Administrators. Yet opportunists focus public attention on the 10 percent shortfall.

Pension politics: The facts
Noticeably absent from the political rhetoric reported in the media about defined-benefit pensions is the fact that most public employees are required to contribute a specified percentage of their salary to their pension.

According to the 2005 State Employee Benefits Survey published by Workplace Economics Inc., the average employee contribution is 4.7 percent of salary for general, nonuniformed state employees. (The survey reflects policies in effect as of Jan. 1, 2005.)

The average state contribution rate, on the other hand, is 8.5 percent for general, nonuniformed workers.

While payroll departments keep workers current on their pension payments, the same cannot be said for employers’ contributions.

A significant part of the reason for the funding shortfalls in pension systems across the nation is that the employers—state and local governments—haven’t been making their payments into the systems.

During the stock market heydays when pension systems experienced significant growth in investment earnings, governments seemingly threw out their coupon books.

Likewise, when state and local budgets were strapped for cash in the early part of this decade, employers weren’t fully funding their pension obligations as they nipped and tucked their budgets.

“At the heart of the current debate is the purposeful misuse of an actuarial phrase called ‘underfunding,’” says John Abraham, deputy director of the AFT’s research and information services department. “The mathematical formula for calculating the level of funding is quite simple: assets in the plan divided by the liabilities, which are the benefits earned by plan participants, as of a specific date.”

Pension politics: Changes driven by ideology, not money
Anti-tax and anti-government groups are behind the push in many states to eliminate defined-benefit plans. In fact, the American Legislative Exchange Council (ALEC) offers its members “model legislation” to do just that. And putting workers in charge of their own retirement is a plank in Americans for Tax Reform president Grover Norquist’s blueprint on how to cut the size of government in half by 2025.

Such groups, says Abraham, encourage legislators to underfund public pension systems, and thereby create a phony crisis—and blame the shortfall on employee benefits.

“This is Grover Norquist saying, ‘I want to shrink government and I want to get unions, which established pensions in the first place, at the same time,’ ” Abraham says. “Norquist believes that if he can destroy traditional pension plans—defined benefits that guarantee workers a lifetime benefit—he can destroy an important link between unions and their members.”

“Unions have to keep pressure on legislators and try to get the message to the general public that this rush to the bottom has got to stop,” says Tom Culley, executive director of AFT Connecticut’s judicial professional employees local. “Public employees shouldn’t be attacked because our benefits are good. We should be looking at private sector benefits that are lousy.”

Illinois: One of the best examples of bad management
Possibly the most extreme example of legislator mismangement is Illinois, where the Legislature has a history of not ponying up its share.

In the 1980s, in an apparent effort to impose some type of self-discipline, the Legislature passed a law saying it had to fund the pension system.

“They ignored it,” says William J. Dick, president of the Illinois Federation of Public Employees, noting that “under their own rules—the law—they were supposed to fund [the public employees system] at 90 percent.”

Moreover, in the early 1990s, the state started picking up the 4 percent state employee contribution, in lieu of giving workers raises. That agreement remained in effect until the 2005 contract year when the responsibility for the employees’ share reverted back to them.

“They were supposed to be contributing in our name, but did the money actually get in there?” asks Dick.

Despite the pension protection clause in the Illinois Constitution, the state’s failure to pay its pension contribution has withstood numerous legal challenges.

In Illinois, the pension systems, which cover current and former state employees, teachers, university faculty and staff, politicians, and judges, have a cumulative $43 billion unfunded liability.

“They don’t tell [the public] the reason that the debt is there is because they didn’t put in the money when they were supposed to,” says Dick. “The system would be fine if it had been funded.”

Alaska’s pension heist
In Illinois, elected officials responded to the retirement systems’ shortfalls by proposing a massive overhaul of the public employees retirement systems.

Thanks to the aggressive—more like relentless—lobbying mounted by the AFT’s state federation and its members, proposed changes to raise retirement eligibility requirements, lower cost-of-living adjustments and institute a defined-contribution system were dropped last year, which means the union can pursue a meaningful, long-term fix to the funding issue.

The Alaska Public Employees Association (APEA), however, was not as successful—although its efforts were just as great.

With a 2003 Alaska Supreme Court decision that said the state can’t diminsh the healthcare benefits of its retirees as the backdrop, Gov. Frank Murkowski went after future retiree benefits in 2005, hijacking the Legislature by threatening to withhold money for new schools, roads and other capital projects if lawmakers didn’t discontinue the defined-benefit pension it offers employees working for state, municipal and burough governments; school districts; and the university system.

The governor won the battle, and effective July 1, 2006, all new hires will be “covered” by defined-contribution retirement and health reimbursement plans.

Sam Trivette, president of APEA’s retiree local, the Retired Public Employees Association (RPEA), says the Legislature’s hastiness may very well cost the state in the long run.

Like PEF’s Robert Fisher, Trivette says he would not have been able to retire in 1998, after 32 years with state government, without his defined-benefit pension. Unlike Fisher, however, Trivette’s Social Security benefit will be limited because the state opted out of the program in 1980. In lieu of Social Security, Alaska offers a supplemental annuity plan, which is similar to a 401(k). It also offers a deferred compensation plan.

“The research out there now shows that for those of us without Social Security and without a defined benefit, chances are you are going to be on public assistance,” Trivette says. “Without my pension and deferred compensation, I would have had to dip into my [personal] savings the day I retired.”

Trivette also is concerned about the state’s ability to recruit and retain workers due to its pay scales, which have fallen since 1984 to 31 percent behind inflation.

“Many of us could have gone to the private sector and made more money,” he says. “But we stayed in public service because we were committed to public service.”

Trivette notes that the Legislature’s so-called solution fails to address the underlying problem: healthcare costs.

“The main cause of [Alaska’s] shortfall is the rising cost of [retiree] healthcare,” says Trivette. “It’s a national crisis, though, not just a public employee crisis.”

Compounding the state’s cost of providing retiree healthcare benefits, says Trivette, was the Legislature’s decision to allow local elected officials, including school board and city council members, to vest in the systems after serving in those positions for five years.

“The pension part is not that big a deal because it is based on salary,” Trivette says, referring to locally elected officials. “But they get the same medical benefits that I do,” despite minimal payments into the system.

“If you take out the healthcare costs for retirees, [the system] is funded at 128 percent,” says Bruce Ludwig, APEA business manager. “Once you throw that in, our system is funded at 78 percent, which is still not bad.”

“One big questions is: What is going to be the impact when you have no new people paying into the current plan after July 2006? That was never answered,” Trivette says.

As one of the appointees to the new Alaska Retirement Management Board, which came about as a result of the retirement system overhaul, Trivette will certainly be pressing for answers to that question.

Retirement security: It’s good for the U.S. economy
One would never know the significant economic implications that lie ahead if the nation’s defined-benefit pension systems were to be deconstructed systematically. Unfortunately, the effects likely would not be felt for generations to come.

Defined-benefit retirement plans “serve a valuable economic purpose, by providing a significant source of domestic savings for our economy and by reducing the burden on the government of providing retirement income for seniors,” according to the February 2006 edition of Benefits & Compensation Digest, published by the International Foundation of Employee Benefit Plans, which is based in Brookfield, Wis.

“Through their size, broad diversification and focus on long-term investment returns, public pension funds stabilize and add liquidity to U.S. and foreign financial markets,” explains a working paper published in 2004 by the Pension Research Council at the University of Pennsylvania’s Wharton School.

“The Federal Reserve System Board reported [in 2004] that the $2.3 trillion held by public retirement systems equaled [more] than 20 percent of the nation’s entire gross domestic product and approximately 20 percent of the nation’s total retirement market.”

New accounting rule threatens public employee benefits
The economic benefits of public retirement systems, however, aren’t just a boost to the nation’s overall economy. They are felt at the local level in communities.

“Retirees pump a lot of money into their communities,” says Hiram Eberlein, PEF Retirees Program director, noting that the “economic impact of a lot of people having a moderate amount of money is greater than 2 percent or 3 percent of people having a whole lot of money.”

There also is the healthcare component of retirement benefits, which arguably keeps many retirees active consumers.

“All states provide or make available health insurance [at a cost] for pre-Medicare retirees, and 48 states provide or make available health insurance [at a cost] for Medicare-eligible retirees,” according to the 2005 State Employee Benefits Survey conducted by Workplace Economics Inc.

Alaska and New York are good examples of the diversity of coverage and plans. RPEA’s Sam Trivette’s healthcare benefits are constitutionally protected. In New York, however, retiree benefits are provided for in statute, notes PEF’s Robert Fisher.

Meanwhile, under a new rule issued by the Governmental Accounting Standards Board, state and local governments are required to disclose their overall retiree healthcare liability, which includes benefits promised to future retirees.

“This is occurring in the context of immense pressure on pensions and healthcare benefits in the private sector,” AFT president Edward J. McElroy says, pointing to recent airline bankruptcies that have robbed employees of their full pensions and shifted liability to the federal government through the Pension Benefit Guarantee Corporation.

Invest in your retirement:  Be active in your union
In a society in desperate need of government programs and services that address the needs of all its citizens, the trend, ironically, is moving in the opposite direction.

Scraps leftover from tax cuts for the wealthiest citizens and corporations have been served to the working and middle classes on a platinum platter. Meanwhile, an increasing number of Americans can’t afford to send their children to college, can’t afford even their out-of-pocket costs for healthcare and prescription drugs, and can’t bank on retiring in dignity.

“This is why you need a union,” AFT president McElroy says. “We aren’t a labor corporation or a labor business. We’re a movement that believes in something and has a point of view about decent jobs, healthcare and retirement.”