Effects of Pension Plan Changes on Retirement Security

Source: Danielle Miller Wagner, Joshua Franzel, Elizabeth Kellar, Amy Mayers, Bonnie Faulk, Alex Brown, Keith Brainard, Jeannine Markoe Raymond, Dana Bilyeu, and Ady Dewey, Center for State and Local Government Excellence and National Association of State Retirement Administrators, April 2014

Key findings:
– Pension reforms reduced the amount of retirement income new employees can expect to receive compared with that of existing employees. Reductions ranged from less than 1 percent to 20 percent.
– New employees can expect to work longer and save more to reach the benefit level of previously hired employees.
– Hybrid plans adopted in five states produce a wide range of estimated retirement incomes. Holding investment returns constant, the determining factor in the size of the hybrid benefit is employee and employer contributions. For this analysis those states with higher required contributions produce a higher benefit than those whose statutory contribution rates are lower.
– Changes to retirement plans include an increase in the number of years included in the final average salary calculation (21 states); a reduction in the multiplier (12 states); and a change to both of these variables (nine states).

The report calculates the retirement income that state and local employees hired under the new benefit conditions can expect, and compares it with the retirement income they would have earned before the plan was changed. The report was produced with financial support from AARP.

Since 2009, 45 states have responded to fiscal constraints by making significant changes to their retirement plans, including increasing employee contributions, reducing benefits, or both. Other states have modified their plan design, choosing to transfer more of the risk associated with providing retirement benefits from the state and its political subdivisions to its employees.

The report also summarizes interviews conducted with public sector human resource executives and retirement experts from 10 states that have made significant pension plan changes (Alabama, California, Colorado, Hawaii, Missouri, Ohio, Pennsylvania, South Carolina, Tennessee, and Virginia).

Although newly hired employees will need to work longer or save more to have the level of retirement benefit that employees previously earned, state human resource officials say that wage stagnation and the increased cost of benefits for employees is a more immediate concern. To address the savings gap, many plan administrators are providing enhanced