Government workers worried about retirement should take steps to protect themselves.
The battles in Wisconsin and Ohio between public employees who have guaranteed, often inflation-indexed pensions and taxpayers who lack such generous and dependable retirement benefits could soon boil over into other states.

The frustration and anger behind this conflict isn't hard to understand, no matter where you stand on the issue. Taxpayers hit by joblessness and declining wages are being asked to accept higher taxes and fewer services, in part because of unfunded public employee pension demands. These bills are coming due at the same time workers in the private sector are facing retirement -- often without enough savings or a dependable pension plan of their own.

On the other side of the table are public employees who argue that they have been promised these benefits and are counting on them. They also point out that while public service jobs are generally dependable, they are rarely high-paying, and generous pension benefits have always been the carrot that keeps good workers on the job.

The pension deficit

No matter what side you are on, the shortfall appears daunting. Pew Center on the States, a research and public policy initiative, released a report in 2010 estimating a $1 trillion gap as of 2008 between what public workers have been promised in pensions, health care and other retirement benefits and the money put aside or otherwise available to pay those obligations.
Some economists say part of the problem will disappear when the economy recovers and baby boomers die off, but others argue that Pew is underestimating the gap and no matter how much the economy improves and how many people are no longer collecting, it won't be enough to pay public pensioners all that they are owed.

"Municipalities have made promises they can't keep," says Jonathan Bergman, vice president of Palisades Hudson Financial Group in Scarsdale, N.Y. "There isn't enough money to perpetuate the system. What I think will eventually happen is that cost-of-living adjustments embedded in plans will be reduced or eliminated."

Changes afoot in pension policy

In some parts of the country, beleaguered taxpayers are already attempting to renege on the promises made to teachers, police and firefighters.

In a handful of states -- Colorado was first -- legislators are trimming cost-of-living adjustments for current retirees. Affected retired and soon-to-retire public employees have joined together to sue, and the courts are still deciding whether the states have to pay up.

Meanwhile, officials in Wisconsin and Ohio recently made headlines by attempting to end collective bargaining rights for public employee unions -- a controversial step that some opponents consider morally offensive.

In many other locales, officials are quietly creating tiered benefit systems, leaving the obligations to current retirees and soon-to-retire workers untouched while replacing traditional pensions with 403(b) plans for new and non-union employees. And in still other places, public sector workers are being asked to fork over a portion of their earnings toward their pensions.

"It's nerve-wracking," says Ann Fickel, director of legislation for the Texas Classroom Teachers Association. "It makes us especially nervous that we don't have Social Security to rely on either."
Some public employees, like those in Fickel's 50,000-member organization, aren't covered by Social Security and are affected by the federal Windfall Elimination Provision, or WEP, which reduces any Social Security benefit they earn elsewhere.

The WEP affects federal employees hired before 1983, when all new hires were required to pay into Social Security. It also affects the 25% of state and local government employees and retirees nationwide, including many teachers, firefighters and police, who are in non-Social Security positions. These workers -- even if they have paid into Social Security while working elsewhere -- take a significant benefit haircut. Their spouses are also affected under the sister provision, Government Pension Offset, or GPO, which reduces spousal benefits. A worker isn't affected by WEP -- and their spouse isn't hit by the GPO -- if they have worked under Social Security for a full 30 years.

What public employees can do

The pension fight promises to escalate, with almost every government entity facing rising deficits and pinched budgets. What should you do if you are a public employee or the spouse of a public employee caught up in this mess?

Edward A. Zurndorfer, a financial adviser in Silver Spring, Md., who specializes in offering retirement advice to federal and other public employees, makes the following suggestions.
Understand your current plan. Don't take co-workers' interpretations as gospel. Get help from your union attorney or someone else who is qualified to explain how your government employee pension is likely to affect you and mesh with other plans for which you may qualify, including Social Security.

Don't quit early. Workers who quit well before 65 or 66 are the most vulnerable to cuts and low or no cost-of-living adjustments. If you can, keep working until your full retirement age.
Qualify for Social Security. You can do this by working under it for at least 10 years or 40 quarters. WEP and GPO will reduce how much Social Security you are entitled to receive, but they won't eliminate your benefit entirely. If you are close to having worked a full 120 quarters under Social Security, make that your goal.

Build your savings. If you have access to a tax-advantaged savings plan such as a 457 or 403(b), put in at least 10% of your paycheck, whether or not it is matched by your employer. There is no such thing as having too much savings.

Get involved. Learn what changes are in the wind and -- realistically -- what kind of impact they could have on your situation.