A Tower of Tiers

Source: Jonathan Walters, Governing, May 2008

Pensions are getting less generous for a new generation of government workers. Will they tolerate equal work for unequal benefits?

Starting next July, public employees hired in the state of Kansas will be second-class citizens, in a way. They will have to pay more into the employees’ retirement fund than workers who came on board before them do. They’ll have to clock more years on the job in order to collect their pension. And when they do go on to retire, the new group of workers is set to receive less generous payouts than their brethren hired before July 1, 2009.

It’s not for spite that the future hires are getting a lesser deal. The reason is more straightforward than that. The Kansas pension system is $5.4 billion short of full actuarial health. By lumping the next generation of workers into a second “tier,” Kansas expects to take considerable pressure off the pension fund’s long-term finances. What’s more, since the workers getting nicked haven’t even accepted the job yet, there was no natural constituency to oppose the plan in the legislature.

The notion of dinging future hires in the name of pension health is nothing new — New York State began tiering its employees back in the early 1970s. But with retirees living longer, the stock market in flux and state and local budgets getting tighter, a growing number of states are tiering in the name of maintaining their pension funds. Just in the past three years, Arkansas, Colorado, Louisiana, Mississippi, North Dakota, Rhode Island and Texas have acted to create new classes of employees. For anyone about to go into government work in those states, retirement may be a little further out , and a little less sweet, than for those who toiled before them.

As Kansas found, tiering can make for an elegant political fix. That’s particularly true because state law in Kansas, as in many states, prohibits taking away benefits promised to existing employees. There’s evidence, however, that bifurcating pension benefits simply pushes pension conflict down the road. As the second tier’s ranks swell and gain in political power, those employees inevitably agitate to win back what they lost before starting to work.

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