Will Public Employees Cut Their Own Pensions?
A firefighter wants the state to cut his own pension? It's hard to believe, especially as the increasingly acrimonious debate over public pensions divides public servants and their employers. But that's just what the The New York Times reported earlier this month. And it's not as crazy as it sounds.
Bryan Jeffries, head of Professional Fire Fighters of Arizona, argues that pensions must be reduced to prevent layoffs and wage cuts. Like counties, cities, and towns in other states, municipalities across Arizona are being forced to contribute more to the state's pension fund for police officers and firefighters to make up for past shortfalls.
Contributions now average one-third of payroll, more than twice as high as they were 10 years ago. A typical Arizona city that pays a firefighter an annual salary of $60,000 must send another $20,000 to the state to cover pension costs. Some localities, such as Tempe, must contribute as much as half of payroll to the pension fund. As pension costs escalate, something has to give. Taxes must rise, some public-sector jobs must disappear, or public-sector salaries must be trimmed.
Jeffries's Plan to Cut His Own Pension -- and Those of Other Public Servants
Jeffries's solution is to cut pensions for new hires, retirees, and veteran police officers and firefighters (like himself). Currently, retirees receive pensions that initially pay benefits equal to 2.5 percent of their final average salary multiplied by years of service. Jeffries doesn't want to change this benefit formula. Instead, he advocates boosting required member contributions, raising the number of years that police and firefighters must work before qualifying for benefits, and reducing post-retirement benefit escalators.
Under Jeffries's proposal, all plan participants would have to contribute 11.65 percent of their salaries, up from 10.35 percent today, and new public safety workers would need to complete 25 years of service to qualify for benefits -- up from 20 years for workers already hired. As before, they could begin collecting as early as age 52.
The last piece of his proposal is the most consequential but also the trickiest. The plan now automatically raises benefits 4 percent per year. Such escalators are usually justified to protect beneficiaries from inflation, and many state and local retirement plans -- as well as Social Security -- link annual increases to the change in the consumer price index. All retirees in the Arizona plan, however, receive annual raises regardless of how much prices change. Such automatic increases don't make much sense.
Jeffries's proposal would limit automatic benefit increases to no more than 2 percent per year and forbid them if the pension plan is not adequately financed. Halving automatic escalators would reduce the value of lifetime benefits by about a third, even when the plan is fully funded. However, slicing benefit escalators for retirees involves the additional hurdle of amending the state constitution, because the courts recently ruled that reducing retirement benefits already promised to state workers is unconstitutional.
Better Ways to Reform Arizona's Police and Firefighter Pensions
It's encouraging that some public employees are acknowledging the financial burdens that rising pension costs impose on local government. But there are better ways to reform Arizona's police and fire plan.
• First, eliminate automatic benefit escalators altogether, but add real cost-of-living adjustments that tie benefit increases to changes in the consumer price index.
• Second, push back the retirement age, so employees can no longer begin collecting retirement benefits at age 52, when nearly everyone is still able to work.
• Third, distribute benefits more evenly across the workforce. Our state and local pension report card recently gave the Arizona plan a D, partly because it failed to provide any benefits to shorter-term employees. Instead of raising the required years of service needed to qualify for benefits, reforms should provide some benefits to retirees with as few as five years of service. And the earnings base used to compute benefits should grow with inflation for those who leave the job before they begin collecting, so that benefits aren't based on decades-old salaries that have lost much of their real value.
Such reforms would provide some retirement security for all public servants protecting Arizona's communities, without upending local government budgets.
Richard Johnson is a senior fellow with the Urban Institute and director of the organization's Program on Retirement Policy. This piece originally appeared on the Urban Institute's MetroTrends blog.