The Relief

The United States needs a form of federal relief that addresses the excesses of our public pension system, steers us away from municipal bankruptcy and protects plan participants who rely on their pension benefits the most. This relief is not a bailout, but rather a law that would allow state and local governments to reduce benefits under certain conditions and thereby prevent the collapse of troubled funds. Existing legislation provides a potential roadmap for federal action. ERISA forced private sector employers to put required money into their pension plans each year and outlawed abuses. But ERISA conspicuously exempted public pensions. The Windfall Elimination Provision of the Social Security Act, passed in 1983, reduced Social Security payments when recipients also receive pensions from public employment, curbing double-dipping and protecting the Department of Treasury. Most recently, in 2014, Congress enacted the Multiemployer Pension Reform Act (MPRA) that provides a pathway to plan modifications and benefit reductions for troubled multiemployer pension plans. All three offer hope that we can find a federal solution for underfunded public pensions. Federal relief must uphold the original intent of the pensions: to keep retirees who can no longer support themselves out of poverty. To do this, strict standards would have to be established and enforced. State and local governments would have to voluntarily seek relief, and pension plans would have to be in extremely bad shape to qualify.

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How would plans qualify?
How would relief work?
How would the relief affect plan beneficiaries?
How would plans qualify?
  • The pension plan must have a funding ratio of less than 50 percent.
  • The pension plan must have failed to increase its funding ratio over the past five years.
  • The state/local government must already collect taxes equal to or above the average for comparable entities. For both state and municipal governments, this would be inclusive of all forms of taxation combined, including sales, income and property.
  • The entity must terminate the pension plan and replace it with a defined contribution plan, such as a 401(k) or 403(b), or enroll active employees into Social Security. The Tennessee Valley Authority Board voted for such action in May 2016.

These troubled plans are in fiscal quicksand and cannot be saved without significant changes. Once the relief is approved and the pension plan is terminated, the local government must then raise taxes to fully fund the terminated plan. This solution would require shared sacrifice from both taxpayers and beneficiaries. Taxpayers would endure higher taxes and some beneficiaries would see their benefits reduced. A federal fix must reduce excessive payouts in order to protect those with modest pensions from any cuts at all.

How would relief work?
  • The plan would not pay benefits until a retiree reaches age 65.
  • Payments would be capped at 150 percent of the median income of the jurisdiction seeking relief. This is a liberal amount when compared to Social Security; for example, according to the U.S. Census Bureau’s latest data, the median income for the nation is $53,657.
  • If a retiree receives a pension from more than one public pension plan, the benefits of each would be reduced proportionally so that the overall payments would not exceed the cap.
  • Automatic cost of living increases (COLAs) that now exceed expected inflation would instead be tied to increases in the local median income.
How would the relief affect plan beneficiaries?

Here are a few examples:

  • A recently retired firefighter from a city whose plans are close to 100 percent funded: This retiree would not be affected because the plan does not quality for the relief.
  • A police department retiree over the age of 65 receiving a pension of $50,000 a year from a plan that qualifies for the relief. This retiree would continue to receive their pension payments, but the automatic COLA each year would be replaced by a median income formula.
  • A 70-year-old retired school principal receiving a $150,000 annual pension that qualifies for relief, and living in a state where the median income is $57,000. This retiree would see his/her pension reduced to 150 percent of the median income, or $85,500.
  • A 55-year-old retired city worker receiving a $60,000 pension in a municipality that qualifies for relief. This worker would have to wait until they are 65 years old to begin receiving the pension. If $60,000 is less than 150 percent of the local median income, the amount she receives would not change – if it is more, then her pension payment would be capped accordingly.
  • A retired policeman who became a city councilman, later a county board member and who receives three public employee pensions equaling $180,000 in a state that qualifies for relief. This retiree would have each pension reduced, so that the total from all three would not exceed 150 percent of the state’s median income. In a state that has a $50,000 median income, his pension would be reduced to $75,000.
A Call for Federal Reform

A Call for Federal Reform

In 1961, President John F. Kennedy established the Committee on Corporate Pension Funds. Thirteen years later we had ERISA, and nine years later, the Windfall Provision. And then, nothing. For 33 years. CPI is not the first to suggest a form of federal relief. Congressman Devin Nunes (R-CA) proposed withholding federal aid to units of government that don’t accurately report pension funding. This addresses the reporting problem, but not the issue of underfunding. Others have suggested a law that would allow local governments to seek relief from pension debt in bankruptcy court. However, that leaves too much discretion to judges and could lead to outcomes that are widely different from one case to another. The plan proposed here would create a concrete path forward that would protect retirement income for those unable to support themselves, make the burden for local taxpayers somewhat manageable, and allow local governments to finally deal with this monumental problem once and for all. The President we elect this November must take federal action – appoint a commission to study the problem. And Congress should urgently address the issue with hearings and studies. Both parties should commit to having relief enacted before the end of 2017. We are already years behind and the debt is mounting daily.

Comprehensive Settlement

Comprehensive Settlement

A comprehensive settlement involves sacrifice from all parties. It must include structural changes in the public employees pension program, changes in benefits and a significant infusion of taxpayer dollars through a fund that cannot be touched for other purposes – one that is securely earmarked to bail out the pension liability. The first two components are made possible by our proposed federal relief. Once a plan seeks and obtains this relief, the local governmental entity would need to raise taxes that would be legally dedicated to the pension plans – thus securing the issuance of pension bonds. Bond proceeds would go into the plan to fully fund the benefits remaining to be paid out. The below video demonstrates how this would work, using the City of Chicago as an example.

Fully funding the benefits is the last step in solving this problem.

Impact by the Numbers

For an example of how the federal relief’s provisions would impact pension payments, please see the chart and descriptions below, which demonstrate the effect of each piece of our proposed relief. The following is based on a public employee retiree whose initial pension payment is $60,000 with a three percent compound COLA.

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  • Column two shows benefit payments with a pension starting at $60,000 and a three percent compounded COLA each year – not using any of our relief provisions. This retiree would receive a total amount of $2.7 million by the age of 85.
  • Column three shows the impact of solely implementing the 65 retirement age, and still utilizing a three percent compound COLA – which would save nearly $1 million in this case.
  • Column four adds a benefit cap of 150 percent of the median income to the previous scenario (in this case using 150 percent of the U.S. median income, which comes out to $79,500), saving another nearly $100,000.
  • Column five reduces the aggressive COLA increase to one percent, which is much closer to average median income increases, in addition to the previous two provisions – saving an additional $160,000.

In total, this example demonstrates the potential savings our relief would produce– in this case, in excess of $1.3 million. Imagine what this type of savings would do for a city, state and our country if multiplied by all of the beneficiaries receiving pensions from troubled funds.