Now they're cutting the pensions of current retirees.

The benefits of public employees, including teachers, have been under attack lately. The lightning rod for these attacks appears to be the defined benefit pension that used to be one leg of the three-legged stool that held up the American retirement system. The other two legs were Social Security and personal savings.

Private companies shed their pension plans and switched workers to the defined contribution 401(k) plans. Public employees, largely, were able to hold onto their traditional pension plans. In past posts we've shown how, to provide the same benefit, the 401(k) plan must accumulate twice as much money per retiree as a traditional pension plan. (See What's so bad about 401(k)-type plans?) Certainly doesn't sound like a less costly plan for the employer, does it?

Current retirees have, until now, been able to breathe fairly easily. New pension tiers have been created which only affect new hires. Everybody agrees that's legal. Some public employers have attempted to "freeze" pension benefits for current employees and reduce them going forward. Lots of legal wrangling about that, but it still doesn't touch the pensions of current retirees. Then came Rhode Island.

The NY Times reported recently that two municipalities in Rhode Island have cut pension payments to current retirees by up to 55%. Let's talk about how that happened, and the legal argument which could see it happen in NY, our constitutional protection notwithstanding.

What's wrong in Rhode Island? First of all, the last governor balanced the state budget by slashing aid to cities. According to Joe Nocera's NYT column: "All of Rhode Island’s poorer cities had become dependent on that aid, so when the economy soured, they essentially ran out of money. Providence had to renegotiate the retirement benefits of its municipal workers. Central Falls actually sought bankruptcy court protection — and a receiver was put in charge of its finances."

Now comes the interesting part. Just as with the state-appointed "receivers" in Michigan, the person appointed becomes what is essentially a one-man local government. In essence, elected local government is replaced by a dictator who can, among many powers, nullify contracts with local public employees. In the case of Central Falls, RI: " ... the receiver took an ax to retiree benefits, cutting them by 55 percent, meaning that many retirees are now getting pensions of under $20,000."


WPRI, the "Eyewitness News" station in Providence did a good analysis of the situation. When asked why benefits for current retirees needed to be cut, they have this explanation: "That gets to the heart of the current problem. Since 2005, the General Assembly has actually changed the pension system a lot for people who haven't retired yet - the benefit is less generous. But much of the state's problem is the shortfall left behind from retirees who are already done working and are now collecting a pension.The vast majority of the deposit Rhode Island taxpayers put into the fund each year now isn't for people who actually work for the government today; it's to help pay for the pensions of people who retired years ago or are far along in their careers. [State treasurer] Raimondo often says the problem can't be solved by only targeting recently hired workers and new employees."

Sounds like those greedy public employees are at it again. But wait, the real cause of the problem is about to make an appearance!

When you set up a pension system, three things must happen: 1) First, the system is designed. 2) Next, people who understand mathematics must be hired to figure out what the system will cost. 3) Money must actually be set aside to meet the future pension obligations. We have done this in New York and it's working just fine.

WPRI points out a slightly different scenario in Rhode Island: "Retirees also say it's not their fault the pension system is in trouble, that they've always made their required contributions and now the state isn't keeping up its end of the bargain. There's some truth to that. The state didn't start putting the full amount of cash needed into the fund until 1986, half a century after it was created – and even after that the General Assembly has often found ways around paying the bill." [Emphasis mine.]

Well, duh! Just what the hell did they expect would happen? Look around the country. Wherever you find a pension system that's in trouble, you're sure to find a similar story. The system was set up, but was never properly funded. And then the public employees have the audacity to expect the pensions that were promised to them in lieu of raises many years ago. How dare they! Have they no shame?!