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October 8, 2012

$1.4T in states’ pension fights foreshadowed

PROVIDENCE, R.I. — Retired social worker Jim Gillis was told his $36,000 Rhode Island state pension would increase by $1,100 next year to keep up with inflation. But lawmakers suspended annual increases, leaving Gillis wondering how he’ll pay medical bills.

“When you’re working, you’re told you’ll get certain things, and you retire believing that to be the case,” Gillis said. He and other retirees are challenging the pension changes in a court battle that’s likely to have national implications as other states follow Rhode Island’s lead.

Cities and states around the country are shoring up battered retirement plans by reducing promised benefits to public workers and retirees. States need $1.4 trillion to fulfill their pension obligations. It’s a chasm that threatens to wreck government budgets and prompt tax hikes or deep cuts to education and other programs.

The political and legal fights challenge the clout of public-sector unions and test the venerable idea that while state jobs pay less than private-sector employment, they come with the guarantee of early retirement and generous benefits.

The actions taken by states vary. California limited its annual pension payouts, while Kentucky raised retirement ages and suspended pension increases. Illinois reduced benefits for new employees and cut back on automatic pension increases. New Jersey last year increased employee retirement contributions and suspended pension increases.

Nowhere have the changes been as sweeping as in Rhode Island, where public sector unions are suing to block an overhaul passed last year. The law raised retirement ages, suspended pension increases for years and created a new benefit plan that combines traditional pensions with something like a 401(k) account.

“This saved $4 billion for the people of Rhode Island over 20 years,” said state Treasurer Gina Raimondo, a Democrat who crafted the overhaul.

Public employee unions say Rhode Island is reneging on promises to workers.

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