The Battle Over Public Pensions Heats Up With Two Calif. Votes

Dan Caplinger
Pension reform
Pension reform

Many economists view underfunded pensions as one of the biggest threats to the nation's fiscal health. Two key votes in California yesterday show how public sentiment is leaning toward cutting costs, even if it means taking away previously promised pension benefits:

  • In San Jose, voters approved a measure that will require public employees to make a tough choice: Either make greater contributions toward their own retirement, or receive less generous benefits.

  • San Diego voters supported a similar ballot proposal that will cut benefits and impose new limits on pensions for government workers.

But Will It Stick?

Even after the voters have spoken, pension cuts aren't a done deal.

Unions plan to file suit to block the cuts, arguing that workers relied on present benefit levels when they chose to accept their jobs. Previous court cases have typically supported the idea that employers aren't allowed to impose pension benefit cuts on current workers without offering some other type of benefit in exchange.

Private workers have the express protection of the federal law known as ERISA, which prevents private companies from going back on pension-related promises they made to their employees. But ERISA doesn't generally apply to public pensions, arguably giving state and local governments a greater ability to cut pension benefits.

There's no doubt, though, that both private companies and public employers have the right to cut benefits for futureworkers. For decades, the trend in both the public and private sectors has been to make workers increasingly responsible for their own retirement savings, with most employers switching away from traditional pensions and toward 401(k) plans that put the onus on workers to make retirement contributions.

The real problem, though, is that the benefits already promised to currentworkers are behind the potential fiscal catastrophe of public pensions.

%Gallery-143949%Without some type of reform, more cities will start to find themselves in a financial hole they can't climb out of -- and having to squeeze their taxpaying residents to foot the bill.

Voters can see that future, and you're likely to see more measures like the two in California on ballots around the nation in the months and years to come.

For more on the retirement crisis and how you can beat it: