How much are public-sector pensions shrinking? Often, a lot

You’d have to be living in a cave not to have heard that many states are bailing out struggling pension plans by cutting benefits. But how will that affect workers in these states? Researchers who have been sorting through the cuts say the picture isn’t pretty.

Some 15 million state and local workers – about 12 percent of the nation’s workforce – are active participants in defined-benefit pension plans, according to the U.S. Bureau of Labor Statistics. Since the financial crash of 2008-2009, 45 states have changed their pension plans, according to a new study by the National Association of State Retirement Administrators and the Center for State & Local Government Excellence.

Public employee unions are challenging many of the reforms in court on constitutional grounds, since state constitutions often contain provisions protecting pension benefits. But in states where cuts are upheld, the long-range impact on many pension programs will be sharp, with lifetime benefits cut as much as 20 percent. Inflation protection also will be eliminated in many cases, and some workers will find themselves shouldering more individual risk and responsibility as plans shift from defined-benefit to defined-contribution structures.

Cuts in annual benefit amounts ranged from 1.2 percent in Massachusetts and Texas to 20 percent in Pennsylvania and Alabama. The average across all states was 7.5 percent.

The key implication: Workers will need to save more to maintain their standard of living in retirement.