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Manhattan Institute

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The Limits of Retrenchment


The Limits of RetrenchmentThe Politics of Pension Reform

September 5, 2015
Public SectorPension Reform
Urban PolicyPublic Sector Reform

Executive Summary

The Great Recession sparked a powerful movement to rein in public-employee pension systems across the United States. Since the economic downturn that began in 2008, all 50 states and Puerto Rico have enacted some sort of pension change: 21 states did so in 2010, and 29 did so in 2011. A few more states did so in 2012 and 2013, while others modified legislation passed in 2010–11. The thrust of these changes was almost universally toward pension retrenchment.

States sought to make their pension plans less generous in order to take pressure off their budgets. Most states increased employee contributions and lowered benefits for new hires. Other changes included raising retirement ages, lengthening vesting periods, reducing cost-of-living adjustments, and eliminating spiking options. Barring future changes, state pensions in the long run will be less generous, and public employees will receive less in overall compensation.

On the surface, it seems that state politicians did not, in Rahm Emmanuel’s now-famous dictum, “let a serious crisis go to waste.” However, many observers believe that few of the aforementioned reforms fully addressed states’ longterm fiscal problems. Most of the changes apply only to new hires, not to existing employees or those already in retirement. Therefore, the savings from these plans will take decades to materialize. That even passing mild pension reforms proved contentious reflects powerful political alignments that militate against retrenchment. The key players in pension reform have strong incentives to push costs into the future and avoid tough choices in the present. Consequently, most states did just that.

But a handful of states took more dramatic action, genuinely trying to do something about their pension systems with a view to the long term. States where major reform did occur stand out: they include (but are not limited to) Rhode Island, Utah, Virginia, and New Jersey. These few states offer lessons about when and why pension reform can work. They point the way toward successful political strategies for serious pension reform that might be emulated elsewhere.

A number of factors conditioned which states were willing to enact far-reaching reform. Most states found themselves constrained by some combination of voter apathy, public-employee union pressure, existing legal provisions, and politicians’ desire to avoid blame. Yet some states managed to overcome those barriers. A few things helped them do so:

  1. A leader (or leaders) emerged who understood public pensions and was willing to tackle the issue. Reform requires a person with the credibility to serve as the public face of change. These leaders were willing to engage in a serious campaign of civic education. The way they framed the issue was hugely important, as it reduced the appearance that reform was designed to punish public employees or those already in retirement.
  2. Preexisting fiscal conditions often shaped which states determined to take action. Whether the states had long-standing problems or took a particularly hard hit during the 2008–09 recession often provided the impetus for putting pension reform on the agenda.
  3. Legal barriers—from state constitutions to statutes to collectively bargained contracts—allowed less flexibility in some states than in others. A few, such as Illinois, are in bad fiscal shape, but the state constitution has severely limited what legislators could do to address the problem. Other states confront lower legal hurdles to reform.
  4. The power of interest groups, especially public-sector unions, shaped what policy options were on the table, how hard fought the politics would prove to be, and the extent of litigation after the passage of new legislation.

Genuine reform, rather than just kicking the can down the road, can happen. States that are serious about getting a hold on pension costs are increasingly introducing defined-contribution options or hybrid plans. At present, at least a dozen states offer such plans. As more states take this step, it will become less controversial and easier for other states to follow suit. This bodes well for the next round of pension reform.