Could State Workers' Pensions Run Dry? A Conversation With Scott Beaulier

May 21, 2014

A new study says Alabama state worker pension funds could run out of money in a decade if changes aren't made. The report from the Manuel H. Johnson Center for Political Economy at Troy University is part of a larger effort to look at improving the lives of Alabamians. Scott Beaulier is Director of the Johnson Center. Alabama Public Radio’s Ryan Vasquez recently talked to him about the paper and if the plight of Alabamians really differs that much from other states.

Scott Beaulier: Our pension problem is a pretty big one. It’s something that compared to other states we’ve been a little bit slow and behind the curve in addressing. So there are states that have really shored up their funding problem and we’ve reformed a little bit in the last few years but we’re lagging behind and that’s partially why we took on that particular issue.

Ryan Vasquez: So what are some of the potential fixes for this underfunded pension system?

Beaulier: So the pension chapter is something that Eileen Norcross a national expert actually wrote for us. One of the things she’s really hammering in her work is the need for proper accounting, proper accounting of our liabilities. The estimates by the RSA are that liabilities are about 15 billion dollars; Ms. Norcross meanwhile says they are actually about 60 billion dollars so that’s a four-fold difference so she’s emphasizing that a starting point of just to properly account for liabilities and if we do that we’re at least understanding kind of the magnitude of our problem.

Vasquez: The pension program in this state at least the one you’re looking at is relatively large it encompasses a lot of people. I would probably say it’s the largest pension system in the state. Of the working population I guess how much does it represent? Do you have an idea?

Beaulier: Sure, so the RSA includes three different plans: a teachers plan, a public sector employees plan, and then a plan for judges as well. The total number of employees covered by RSA is at about 335,000. Public sector employees, if you add to that federal employees in our state, you’re looking at about I believe it’s one in nine or one in ten that’s a public sector employee.

Vasquez: So this issue could really come up and bite the state as you see maybe more baby boomers transitioning over into their retirement plan.

Beaulier: Changes in the defined benefit structure haven’t kept up with changes with life expectancy. It’s great that we’re all living longer but reform and political reform is very slow and kind of lags behind what we’ve seen in life expectancy. Americans today can look forward to living to probably 80, maybe even a little more than that especially if you’re female. And we still have a pension system that’s built for death around age 60. So it’s not surprising in some sense that we have this massive unfunded liability but the lack of addressing it is a real concern.

Vasquez: How much of it is the competition of political measures versus practical measures?

Beaulier: Yeah, it’s a little bit of both I think that’s in play certainly politically any kind of change that you make to the pension system you have this group of 335,000 people who are going to dig in and resist and we see this in places like Detroit, you know Detroit is farther along the curve than we are in terms of a pension system that has collapsed but even as the city has gone bankrupt, the pensioners are still digging in and saying we don’t want any kind of cut in our benefits. Everyone else is having to give up something but they’re really united strongly against any kind of change.

Vasquez: Typically when I’ve looked at these I’ve always felt that the, not that I’m any kind of expert just by opinion–wise and just covering it, it’s a two-pronged approach to fixing it I guess you have to cut it off at one point and maybe fund it, you have to put a boost of money in to make it to a point where it’s okay. And then from that cut-off point down everyone underneath there, or the new incoming people, need to shift over to the new system. Is that the way to go? A two-pronged approach where you get the people a little further along the road and you can’t really just cut them off and change them. And you can make them happy by saying ‘We’re going to fund this and we’re going to keep it going and then everybody else has to shift over to the new point. And where do you establish that cut off point, I guess?

Beaulier: Yeah, so the sooner you do it the less that liability becomes. If we wait ten years on this the liability will be even larger. But you are indeed correct that you have to have an approach to deal with young employees, non-vested employees, and then also everyone else who has earned benefits and basically under state law and under the constitution have rights to those benefits and they’ll get those benefits almost with certainty. So that group basically you just cap and you say this is our liability we’ve promised this to you and we’re going to pay it. For new workers, what you can do is you can say everyone new gets this new program with either less benefits or maybe a defined contribution approach. You also have a small group that aren’t vested. I would be in this group. I’ve been at Troy University four years. You give them the option of either with sticking with the old or converting to the new and I think many people in my category who are young and understand defined contribution approaches who have some taste for mobility; they might leave their job, leave the state in five or six years. They would actually prefer the defined contribution option instead.