Sections

Letter from the US: End to pensions taboo

Related Categories

Pension reform is no longer a taboo subject for voters: this is one of the outcomes of the 4 November mid-term elections. 

All candidates with a record of defying public union power and who had previously cut public spending on pensions have been re-elected, despite heavy campaigning against them by the unions. This was the case in six crucial gubernatorial races in the states of Rhode Island, Illinois, Wisconsin, Florida, Ohio and Michigan; and also in the race for mayor in the city of San José, California. The only defeat for reformers was in the city of Phoenix, where the Pension Reform Act (Proposition 487) was rejected. 

But the governors’ victories are more meaningful because some of the winners might also consider running for the White House in 2016. Even if substantial pension reforms are not discussed in the next two years, the topic could become part of the next president’s agenda, regardless of party.

Democrat Gina Raimondo’s success in Rhode Island could have the greatest impact. According to Darrell West, vice-president of governance studies at the Brookings Institution and Wendy Schiller, associate professor of political science and public policy at Brown University, her victory could embolden Democrats in other states to take on pension reform, especially in those with troubled retirement systems. 

In 2011, as Rhode Island treasurer, Raimondo led the promotion of a law to reform the state’s $8bn (€6.4bn) Employees’ Retirement System. This cut public-employee pension obligations by creating a hybrid DB/DC plan, raising retirement ages and suspending cost-of-living increases. Unions sued to overturn the law, which took effect in July 2012. A judge ordered mediation, but a proposed settlement was rejected by a police union last April. So when Raimondo won the Democrat primaries, most union members decided to support the Republican candidate Allan Fung and, according to polls, the race was essentially tied. But. Raimondo won nevertheless – with 40% of the vote against 37% – and became Rhode Island’s first woman governor.

Pensions were also a hot issue in the race for Illinois governor. Republican Bruce Rauner defeated the incumbent and an alliance between Democrats and unions by campaigning on pension reform. Illinois is the state with the most underfunded pension system and the lowest credit ratings (A3 and A-minus for its bonds).

In Wisconsin, Florida, Ohio and Michigan incumbent Republican governors were all confirmed. In Wisconsin, Scott Walker signed a law in 2011 that made public employees pay more for healthcare and pensions, and abolished collective bargaining for most public workers. He fulfilled his promise to erase a $3.6bn deficit and won with 53% of the vote. In Ohio, John Kasich tried to do the same, signing a law in 2011 to cancel collective bargaining rights in the public sector but voters subsequently overturned the measure. He won re-election, anyway, with a convincing 64% of the vote.

In Florida, Rick Scott implemented a budget-reform policy that required public workers to contribute 3% of their salaries to the state pension fund (they used to contribute zero), and he plans to move more public workers into a 401(k)-type plan. Scott won narrowly with 48% of the vote. In Michigan, Rick Snyder signed a right-to-work law in December 2012 and made pension income subject to state income taxes, simultaneously cutting taxes for businesses. Snyder also won out with 51% of the vote

In San José, the two mayoral candidates were both Democrats – Sam Liccardo backed by Silicon Valley and Dave Cortese by unions. Liccardo supported voter-approved changes from 2012 requiring public employees to contribute more towards their retirement and won 51% to  49%. 

In Phoenix, the Arizona Free Enterprise Club proposed replacing the city’s existing pension system with a 401(k)-style plan for all new employees but this was rejected by voters.   

 

 

Have your say

You must sign in to make a comment

IPE QUEST

Your first step in manager selection...

IPE Quest is a manager search facility that connects institutional investors and asset managers.

  • QN-2496

    Asset class: Commodities.
    Asset region: World.
    Size: CHF 100 – 150 m.
    Closing date: 2018-12-12.

Begin Your Search Here