Rhode Island Pension Cuts Set Chilling Precedents

Labor Notes:

If you thought retiring would help you avoid the ruination of living standards brought on by the economic crisis, Rhode Island’s pension overhaul just proved you wrong.

The changes to the pension system passed last November affect every public employee—current, retired, or prospective. The retirement age rose from 62 to 67 for new hires, and somewhere in between for current employees.

The overhaul moves all public employees into a “hybrid” system, combining a defined benefit plan with a 401k-style plan, thus shifting risk for bad investments onto workers. And it freezes cost-of-living adjustments for all retirees and retirees-to-be for 19 years, sending their standard of living tumbling.

The drama began in spring 2011, when newly elected state Treasurer Gina Raimondo, a Democrat, and Governor Lincoln Chafee, an independent, began focusing on the state’s unfunded pension liability and the looming crisis it represented.

Both politicians had been enthusiastically supported by the labor movement, partially on the basis that they would not touch pensions. But now they argued that the state had on hand only about half the money it would need to pay pensions for state workers and teachers over the coming decades.

The amount that the state owed but didn’t have was the “unfunded liability,” and to make the fund stable, Raimondo and Chafee argued, it had to be funded at a level closer to 80 percent. That’s the “green” level that private sector pensions need to reach under the federal Pension Protection Act.

But that rule doesn’t have to apply to governments. When a corporation is bankrupt, retirees run the risk that pension funds will disappear with the company. Thus workers seek to have much lower unfunded liabilities.

But when a government goes bankrupt, it does not disappear. Even if its pension fund shrinks, it can still be raised again during better times or through increased revenues. The concern around the “unfunded liability” in this instance was used to cut benefits and hurt workers.