Many states have created powerful legal boundaries to protect workers from employers making arbitrary changes to pension plans. These protections, while important, are exceedingly rare in all other professions, and they serve as boundaries that will guide any prospective changes to state or municipal pension plans. Some of these barriers are quite onerous, limiting changes only to future employees, while others are more flexible. New York and Illinois, for example, prohibit any reduction in benefits for current employees if it results in a single participant receiving one single dollar less than they would have received under the old formula, even if the benefits have yet to be earned.
It may be tempting for states to try to fix pressing financial problems by changing the pension system for all workers and retirees, but they should be careful to avoid addressing fiscal issues by making their state less attractive to work in. In most states, the current under-funding problems took years to manifest. Poor investment returns, untimely benefit enhancements, lack of discipline in making employer contributions, and other causes contributed to today’s problems. States shouldn’t expect to dig out of this problem overnight. Nor should they ask retirees or teachers to bear the entire burden of past mistakes.
Instead, states should think long-term about how to get new employees enrolled in more fiscally sustainable and portable retirement plans. At a minimum, states should ensure that teachers leaving the pension plan can take with them their own contributions, the interest those contributions accrued, and a share of the employer contributions that were made on their behalf.