Questions Answered About Pension Plans

Readers recently submitted questions about pension plans to Mary Williams Walsh, a business reporter for The New York Times who has written about how companies manage their pension plans; what happens when companies go bankrupt; public workers' pensions and how they may affect state and local finances; and Chapter 9 municipal bankruptcy. (Not all questions can be answered in detail, and some questions have been edited.)

Q. It seems that conservative politicians are bashing public pension systems in addition to their assaults on public workers. What implications does that have for the future of public pension systems? - Steven M., Sacramento, Calif.

A. Yes, criticism of public pensions has increased sharply. But years before the politicians chimed in, there was already a dead-serious debate as to whether these systems were sustainable. It wasn't among politicians so much as actuaries, economists, accountants and other specialists, some of whom had begun to believe that states and municipal governments - and the professionals who advise them - were routinely underestimating the cost of the pensions they were promising to thousands and thousands of workers. As a result, too little money was being set aside in advance, and some places were bound to come up short when the baby boomers retired. From what I can tell, their concerns were valid, and yet it was years before they could get anybody to take them seriously. In the meantime the problem grew.

Defined-benefit pensions are really good benefits, and it shouldn't come as a surprise that we can't provide them out of thin air. Yet if something is threatening public pension systems, I suspect it's not politicians bashing them, so much as the sticker shock that more and more ordinary Americans will feel when they find out how much they are expected to pay in the coming years for benefits they thought were already paid for.

Q. I've been told that public employees' pensions in New York are “guaranteed” by the New York constitution. Are they? - Smotri, New York

A. I've heard the same thing, not just in reference to New York, but some other states as well. When I've asked legal specialists, I've been told there is no such “guarantee,” in the legal meaning of the term.

What New York State does have is explicit constitutional language stating, in effect, that the pension formula in force on the day an employee joins the public retirement system cannot be reduced for the rest of that employee's public career. This is better protection than workers in the private sector get from the federal pension law; it's also fairly unusual among the 50 states.

The states use a wide variety of legal approaches to protecting their workers' pensions. Amy B. Monahan, a professor at the University of Minnesota Law School, has written a detailed overview of the state provisions, available here from the Social Science Research Network. (The Network requires registration at no cost.)

Ms. Monahan brings up the concept of a state's “police power,” which means its inherent right “to preserve the public security, order, health, morality and justice.” In a state with the type of legal protection New York offers, she writes that just about the only way to curb public pension obligations would be to do so pursuant to the state's police power.

Q. My wife will be turning 62 in November 2014. When should she enroll for Social Security? I will be 65 in March of 2015. When should I enroll? Thank you. - kenb100231, Egg Harbor Township, N.J.

A. There is no single right answer to this question - it depends on personal circumstances that can vary greatly. But for starters, here are a few things to consider. You can apply for Social Security any time from age 62 to 70, but the Administration sets a “normal retirement age,” when a retiree collects a “full benefit.” People who apply ahead of their normal retirement age will have that benefit reduced.

The Social Security Administration has been gradually ratcheting up everybody's normal retirement age. You and your wife both appear to be in the group whose normal retirement age is 66. If your wife worked outside the home and would be applying for her benefits at age 62 - four years ahead of her normal retirement age - her “full benefit” would be reduced by 25 percent. (If she were applying for a 50 percent spousal benefit, the reduction would be 30 percent.) Social Security benefits are adjusted for inflation, but those substantially reduced amounts would be her base benefit for life.

You, on the other hand, would be enrolling just one year early if you signed up at age 65, so your reduction would be considerably smaller, a little less than 7 percent.

But there are many other factors that you and she should consider. What other resources do you have to live on? Does either of you plan to keep working after enrolling in Social Security? (Doing so below your normal retirement age can affect your benefits.) What are your plans for health care? (Medicare, and its required premiums, normally begin at 65, even if you decide not to enroll in Social Security until later.)