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The Sixteen States That are Killing Their Pensions

2. Colorado

Colorado established a defined contribution plan as an option for all state employees in 2004. In 2010, the state increased the amount that the employer and the employee are required to contribute to their pension fund and raised the minimum retirement age from 55 to 60 for people who join the government payroll after the law was passed. Citing U.S. and state constitutional protections against reducing benefits to existing pension plans, a group of retirees have filed a lawsuit challenging the state’s cost-of-living reduction.

3. Florida

Florida began moving away from its defined contribution plan in 2000 with the implementation of the optional Florida Retirement System Investment Plan. Public employees then, and now, could choose which system they would like to be included in, the defined contribution plan or the traditional defined benefit plan. Existing members of the original plan were also given a third option of a combined plan. The state’s defined benefit program has been aided by a mandate that pension surpluses of less than 5% of total liabilities be reserved to pay for unexpected losses in the pension system.

4. Georgia

In 2008, Georgia established a mandatory, hybrid defined benefit and defined contribution retirement plan for public employees.  Under this program, the defined benefit plan provides about half of the payout of the previously existing plan and a defined contribution plan that requires a 1% employee contribution, which is then matched by the employer. Employees may opt out of the contribution plan after 90 days.

5. Indiana

Indiana has offered state employees a combined pension plan for decades.  The state, however, only funds 70% its total pension obligation, due largely to gaps in the funding of the state teacher retirement plan.  In 2007, Indiana established an additional retirement medical benefit account to pay expenses after retirement.  Annual contributions for the account are based on the age of the participant.

6. Michigan

New state employees have had to join a mandatory 401(k) type plan since 1997.  Under this plan, the State government contributes4% of the employee’s salary to their retirement account. Employees, if they so choose, may contribute as much as 12% of their salaries, 3% of which will be matched by the state in addition to the original 4%.  In 2010, a hybrid program was created to include new teachers, who are offered a combination (defined contribution and defined benefit) plan.  The defined contribution component, however, may be opted out of.

7. Minnesota

Minnesota offers a defined contribution plan as the primary plan for physicians, elected officials, city managers, and volunteer ambulance personnel.  The state recently approved higher worker and employer contributions.  It reduced the rate of cost-of-living adjustments and froze those adjustments in 2010 and 2011 for current and future retirees.  This decision has been challenged in a lawsuit filed by a group of retirees.  Politicians, such as former Governor Tim Pawlenty, have called for a greater shift to 401(k)-type plans.

8. Montana

In 2002, Montana created an optional defined contribution plan for state employees who were not teachers.  Newly hired employees are initially placed in the original defined benefit plan and are then given one year to transfer to the 401(k)type plan if they choose.  Employees contribute 7.17% of their salaries, and employers contribute 7.37% of those salaries, to the defined contribution plan.  Lawmakers will consider proposals to raise the retirement age from 60 to 65, boost employee and employer contributions, and increase an employee’s highest average compensation this year.

9. Nebraska

Nebraska operated on a defined contribution retirement system for public employees from 1967 to 2002.  In 2003, that system was replaced by a cash balance plan for new employees.  In this system employees and employers contribute a portion of the employees’ salaries to an account.  The employees do not control the investment of the account, but are guaranteed an annual return of at least 5% a year, minimizing their risk. The account can also receive a higher return, depending on investment earnings. The public employees are given access to the money in these accounts upon retirement.

10. North Dakota

In 1999, North Dakota created a partial optional plan for “non-classified” public employees, most of which are part of the higher education system. Like many of the states on this list, North Dakota, which has a relatively balanced budget otherwise, faces a pending pension budget crisis, in which funds are expected to run out by 2030. The current legislature is considering raising both employee and employer contribution rates.