Government workers feeling pension pressure

Martin Wolk Chief economics correspondent • Profile • E-mail

The promise of a lifelong monthly retirement check, with all the security that implies, has always been one of the biggest attractions of government service, from sanitation workers to members of Congress.

Now police officers, teachers, public health workers and the unions that represent them in many states are scrambling to defend the treasured benefit — one that the vast majority of them still enjoy but is rapidly disappearing from the corporate world.

For the most part they are winning, arguing successfully that providing a traditional pension plan for public workers is a cost-effective investment of taxpayer dollars, helping to attract and retain a higher-quality workforce.

But the stock market runup of the late 1990s and its subsequent collapse has left some state pension funds badly underfunded, opening the door to free-market advocates who want to see public workers funneled into defined contribution pension plans similar to the 401(k) accounts that have come dominate the private sector.

Officials of unions representing public-sector workers describe the battle over the future of retirement as one of their top two priorities, along with health-care costs.

“It is a very hot issue,” said Rich Ferlauto, director of pension investment for the  American Federation of State, County and Municipal Employees. The movement to privatize pensions “really threatens the middle-class lifestyle of people who have worked all their lives,” he said.

In Alaska, lawmakers last year voted to stop offering a "defined-benefit" pension plan, which provides monthly checks for the lifetime of each retiree. Current teachers, police officers and other state and local government employees will keep the benefit, but new hires will be required to participate in a "defined-contribution" plan similar to a 401(k).

Under the new plan employees will contribute 8 percent of their pretax pay into an individual retirement savings account, which their employer will partly match with a 5 percent contribution, with additional contributions for health care and death and disability benefits. The funds will be invested in any of 10 stock or bond funds as allocated by the employee.

Oregon recently shifted to a hybrid that adds elements of an individual account. But elsewhere the idea has been rejected, most recently in California and Colorado.

In essence, the debate over President Bush’s plan to privatize Social Security is being played out on dozens of smaller stages as managers of state and municipal pension plans grapple with the fallout of the 2000-2002 bear market, compounded in some cases by mismanagement, reckless political choices and possibly fraud.

Free-market activists say public-sector employees should shoulder more of the burden for their own retirement security, putting money aside in personal accounts that would get some government matching funds but would be managed by each individual.

That would mirror the trend in the private sector, where only one-third of new employees at larger companies are covered by a traditional pension, compared with 80 percent just two decades ago. By contrast 90 percent of government workers still have a defined-benefit pension plan, according to the Employee Benefit Research Institute.

The push to defined-contribution plans is a worrisome prospect to people like Doris Sutherland, 78, of Grand Junction, Colo., who retired from her job as a secretary for a state agency in 1988 and now lives mostly on her $2,300 monthly pension. Sutherland gets no Social Security benefit from her many years of public service because state and local government workers in Colorado, along with several other states, are exempt from the system.

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Sutherland contributed up to 11 percent of her pay into the state's public-employee pension plan over the years and now is vigilant against any attacks on it, acting as an advocate for retirees in her union, the Colorado Association of Public Employees.

"I think for most of the people that are retired right now, their benefit is pretty secure," she said. "But I don’t want new hires to have nothing to look forward to. If they don’t have a sound retirement (plan), they won't stay any length of time."

Sutherland supplements her income with work as a gift-wrapper and with a small 401(k) from a brief stint in the private sector, but she is skeptical about investing her retirement savings in the stock market. "I don’t think it's that sound of an investment," she said.

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