I’m not a pension expert, but do know a bit about how some public pension plans work in California. I’m most familiar with the CalPERS and CalSTRS systems (the individual employers, like the City of San Diego, can have their own plans, and these can vary greatly from one employer to another). Here’s how the large pension systems work, in general, in California.
If an employer chooses not to have their own pension fund, they can contract with CalPERS or CalSTRS to administer their pension/benefit plans. The obligation, in this case, is between the employer and the pension fund. Employee contribution rates are set by law, which I believe currently caps them at 9%. Employer contribution rates are set periodically, based on actuarial calculations determined by CalPERS, and based on benefit options chosen by the employer.
The mix of employer and employee contributions are often negotiated when contracts are renewed, and employers can “pick up” (pay) a portion of the employee contribution, or they can increase the contribution rate that the employees pay. They can also increase the amount the employees pay, over and above what is “normal” (the fully funded rate) based on actuarial valuations, and can over-fund their pensions, based on my understanding.
The pension obligation lies between the pension fund (CalPERS) and the employees. The pension obligation is NOT from employer to employee, but from pension fund to employee. The obligation to the pension fund is from the employer to the pension fund, but the employer does not directly pay the employees’ retirement benefit — the pension fund is the one obligated there.
When you hear about the iron-clad, “guaranteed” pensions, you are hearing about the *benefits* that are guaranteed to the employees by the pension funds. These benefits cannot be taken away.
What is not set in stone is the contribution rate. This can change, and is often changed during contract negotiations. The cap on employee contribution rates can be changed by the state legislature.
An example (of MANY) where unions made concessions and agreed to increased employee contribution rates:
“Ed Mendel, calpensions.com, 12-16-10
The state payment to CalPERS for this fiscal year was cut by $200 million yesterday, reflecting a savings for the deficit-ridden state from agreements by state workers to pay more toward their pensions.”
“Three sources fund a defi ned benefi t retirement
plan: (1) Employee contributions, which, in
general, are based on a percentage of their
earnings. The percentage is fixed by statute and
varies from about 5 to 9 percent, depending on
the plan type and whether the employee is
covered by Social Security. (2) Earnings from
the investment of System assets in stocks,
bonds, real estate, and other investment
vehicles. The amount contributed from this
source fl uctuates from year to year. (3)
Employer contributions, which are determined
through an actuarial valuation process.”
(BTW, this is an excellent link for anyone who wants to get a better understanding of how public benefit/pension systems work.)
In summary, the benefits are guaranteed, but the contribution rates can change.
I believe we will see new formulas where, if people choose to keep their current benefits, their contribution rates will go up. Otherwise, they can choose less generous benefits and maintain the same contribution rate, and/or they might be given the option to opt-out of the defined benefit, and roll their assets into a defined contribution plan.
