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State Pensions Have to Change

January 26, 2011

Two problems, pensions and health care, are front and center. Let’s hope leadership is also front and center — not the usual ”Delaware Way,” which means there will be much talk, little substance and in the end no public policy.

The easiest problem to deal with is the pension program for state employees, which is based on the following service plan:

•30 years of credited service at any age;

•15 years of credited service at age 60; and

•5 years of credited service at age 62.

The current plan is unsustainable, and this quote from The News Journal lays it out: “Since the 2001 fiscal year, Delaware’s annual pension contribution has skyrocketed by 594 percent, and state employees currently pay 3 percent of their salary earned above $6,000 into the retirement fund. The state’s rate will have to increase from 7.4 percent to 8.37 percent of total salary in the fiscal year that begins July 1 to help make up for stock market losses in 2008 and 2009, said David Craik, director of the Delaware Office of Pensions.”

Here is the hard truth: A pension is a promise, not a guarantee, and the only way to protect state employee pensions is to backstop it with taxpayer dollars. However, only 26 percent of Americans are willing to pay higher taxes to ensure that all pension benefits promised to public employees are paid. Forty-three percent would rather reduce the benefits; 30 percent are undecided.

There is a way, though, to protect pension rights already earned and provide future stability for employees and taxpayers. There needs to be a partial hard freeze on pension benefits.

Current retirees will see no change, and current workers will keep their accrued benefits but will transition to a 401(k) plan for the rest of their state employment, and new workers will be in a straight 401(k) plan. Workers who move into a 401(k) plan will still receive a pension when they retire, but only the benefits they accrued up to the date of the pension freeze.

An important part of the transition to the 401(k) plans is to pay each state employee 7 percent of their normal pay on each scheduled pay period to invest at their free will. This plan will align public-sector workers with the private sector while also protecting previously earned pension benefits while reducing budget pressures.

For those who say this sort of plan is unfair and can’t happen, they are wrong. As an airline employee my pension was valued at well over $1.5 million dollars. It was not modified or frozen — it was terminated. I was a union employee with a negotiated benefit. It might have seemed to be solid but it was not. Over 13,000 employees were affected, and at the time of termination the pension was over 86 percent funded.

The legislature can and should act to provide stability for state employees and fairness for taxpayers. Please act and ignore the Delaware Way so employees do not go through the scenario I did.

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