The Illusion of Pension Savings

New York Times, September 17th, 2010

Earlier this year, Illinois said it had found a way to save billions of
dollars. It would slash the pensions of workers it had not yet hired.
The real-world savings would not materialize for decades, of course, but
thanks to an actuarial trick, the state could start counting the
savings this year and use it to help balance its budget.

Actuaries, including some who serve on the profession’s governing
boards, got wind of what Illinois was doing and began to look more
closely. Many thought Illinois was using an unorthodox maneuver to
starve its pension fund of billions of dollars, while papering over a
widening gap between what it owed and how much it had. Alarmed, they
began looking for a way to discourage Illinois’s method before other
states could adopt it.

They are too late. The maneuver, and techniques that have similar
effects, are already in use in Rhode Island, Texas, Ohio, Arkansas and a
number of other places, allowing those states to harvest savings today
by imposing cuts on workers in the future.

Texas saved millions of dollars this year after raising its retirement
age for future hires and barring them from counting unused sick leave in
their pensions. More savings will appear in coming years. Rhode Island
also raised its retirement age for future retirees last year, after
being told it could save $90 million in the first year alone.

Actuaries have been using the method for years, it turns out, but nobody
noticed, in part because official documents usually describe it in
language few can understand.

The technique is fairly innocuous in normal times, allowing governments
to smooth out their labor costs over many years. But it becomes much
riskier when pension funds have big shortfalls, when they need several
decades to pay down their losses and when they are cutting benefits for
future workers — precisely the conditions that exist today.

“In a plan that is not well funded, I wouldn’t recommend it,” said Norm
Jones, chief actuary for Gabriel Roeder Smith & Company, an
actuarial firm that helps Illinois and a number of other states that
have adopted the method. He said the firm’s actuaries informed officials
of the risks and it was the officials’ decision to use the technique.

Struggling states and cities need to save money, but they run into legal
problems if they tamper with the pensions their current workers are
building up year by year. So most places have opted to let current
workers and retirees go unscathed. Colorado, Minnesota and South Dakota
are the exceptions, dialing back cost-of-living increases for people who
have already retired. All three states have reaped meaningful savings
right away, and all three are being sued.

Read more of this article.

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