The Limits of Retrenchment: The Politics of Pension Reform
October 6, 2015
Since the economic downturn that began in 2008, all 50 states and Puerto Rico have enacted some sort of pension change. States sought pension retrenchment to make their pension plans less generous in order to take pressure off their budgets.
The current trend is that state pensions in the long run will be less generous, and public employees will receive less in overall compensation. However, many believe that these reforms did not fully addressed states' long-term fiscal problems because most of the changes apply only to new hires, therefore, the savings will take decades to materialize.
One major issue is that key players in pension reform have strong incentives to push costs into the future and avoid tough choices in the present. Only a handful of states including Rhode Island, Utah, Virginia and New Jersey were able to carry out effective reforms.
Some of the factors that helped those states were:
- A leader who understood public pensions and was willing to tackle the issue and educate constituents.
- Preexisting fiscal conditions that determined which states took action.
- Legal barriers that allow less flexibility in some states than in others, as in the case of Illinois where the state constitution has severely limited what legislators can do.
- The power of interest groups, especially public-sector unions, who greatly influence policy choices.
States that are serious about keeping pension costs under control are increasingly introducing defined-contribution options or hybrid plans. As more states take this step, it will become less controversial and easier for other states to follow suit.
Source: Daniel DiSalvo, "The Limits of Retrenchment: The Politics of Pension Reform," Manhattan Institute, September 2015.
Browse more articles on Economic Issues