Pressed for cash, states go after pension pot of gold

12/03/2009 9:19 am EST

Focus: STOCKS

Jim Jubak

Founder and Editor, JubakPicks.com

Wonder how governments will close the huge budget gaps created by the Great Recession and the bailouts of the financial crisis?

New York State’s recent budget move provides a pretty good road map. And you can sum it up concisely. Go after retirement programs. It’s where the big money is.

In New York the target was broad and very, very inviting. Legislation that goes into effect on January 1 will raise the retirement age for new state workers to 62 from 55, impose a 38% penalty on non-uniformed workers retiring before 62, and increase the minimum years of service to qualify for a pension to 10 from 5.

The two biggest unions that represent state employees went along with the plan in order to protect a 3% raise promised for this year and to prevent threatened layoffs of 8,700 workers.

New York State has the third largest pension fund in the country with $126 billion in assets as of September 30.

The changes will save the state a projected $40 billion to $49 billion, depending on which politician is doing the math, over 30 years.

Now you may not have much sympathy for new workers who will lose the right to retire at 55. Retiring with a full pension at 62 doesn’t sound so bad to many of us. The retirement age for Social Security is now 67 after all and some of us are planning to work far longer than that.

But it’s the trend that matters. I think actions like those in New York State are just the beginning of a move to cut benefits and extend the retirement  age.

With states facing a combined budget gap of $175 billion or so for the fiscal year that ends in June 2010, putting off the date for retirement with full benefits provides just too much potential cash for legislatures and governors to pass up.

With the federal government looking at a need to cut spending post financial and economic crisis—and with cuts to entitlements absolutely necessary but politically costly—pushing out the day when retirees can get full benefits is the easy fix.

Don’t expect that the easy fix will be the last fix, however. The need for spending cuts and the size of the obligations to retirees at all levels of government and in the private sector too makes a move like that in New York State just the beginning of a long-term trend.

Governments pressed for cash will go where the money is. And retirement programs represent a huge pile of money.

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