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December 02, 2009
January 28, 2011
February 02, 2011
Only halfway through 2011, a number of states have reformed their laws governing public sector workers' benefits, a few of them in dramatic fashion. The need to close the yawning gap between promises made to workers and the dollars saved for them on states' balances sheets is evident. According to a recent analysis, the average household will have to pay $1,398 in additional taxes every year for the next 30 years to fund retiree benefits, with New Jersey taxpayers on the hook for $2,475 per year per household before that state's recent reforms.?Even more optimistic commentators recognize that the funding ratios reported by states themselves rely on rosy assumptions about investment returns that are not likely to be borne out in reality.?Consequently, states have begun to adjust contribution rates, close loopholes, and otherwise modify pension and retiree healthcare benefits.
It is worth noting that most of these reforms leave public-sector workers, especially those newly-hired, worse off. In many states, this is a necessary evil, with budgets straining and taxes being ratcheted ever higher. Some states have done better than others in making fundamental reforms to address the sustainability of workers' benefits without soaking new workers or taxpayers, however. Here are our best and worst of the year so far, recognizing that actions in New York and Connecticut are still pending. Thanks to our indefatigable research intern, Josh Pierson, for digging up some of the details on states' reforms.
Our takeaway from this year's reforms is that many state legislatures and school boards should go back to the drawing board. Move new workers to portable, defined-contribution or cash balance retirement schemes, and put an end to retiree health benefits funded entirely by employers, the costs of which are exploding and which very few private-sector workers enjoy. Use any savings to improve the raises teachers receive in their first few years on the job, when research suggests they make the biggest gains in effectiveness. Continuing to steal from younger and more mobile workers while reducing their benefits is not a viable option and is certain to make teaching less attractive to high performers.
? Chris Tessone