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state capitol file photo for pension story

The 2008 financial meltdown is testing the Wisconsin pension system, which guarantees a minimum benefit based on years worked and salary, with the possibility of increases — called dividends — when fund investment income is good. But investment losses triggered a series of unprecedented dividend reductions that have left the system mulling options with about half of retirees already at their minimum benefit level after 2012 cuts.

Dropping out of the Wisconsin state pension system could be tempting to some government employees, but experts say it would cloud their future financial well-being while potentially undermining a pension fund — now one of the country's strongest — by reducing participation.

Some critics of public employee pensions, however, say workers should have more options to make government employment more attractive, while opponents of government spending say the state system is too costly because it collects $1.5 billion in tax-funded employer and employee contributions annually.

"We need to do what the private sector has been doing and try as much as possible to shed these pensions and get people to take responsibility for themselves and save and invest as much as they can," said Steve Stanek, spokesman for the libertarian Heartland Institute in Chicago. "My retirement plan is to be at my computer and fall over dead."

Wisconsin's 2011 biennial budget set a June 30 deadline for state officials to complete a study of the state retirement system's structure and benefits, including the possibilities of allowing workers to opt for lower benefits by halting their contributions or permitting them to switch to a 401(k)-type savings account.

Those actions could mean greater contributions for taxpayers and employees to keep the system fully funded.

"If you limit the number of people coming into the system, that puts more pressure on the people who remain in the system, and by pressure I mean upward pressure on contribution rates," Matt Stohr, the system's retirement services administrator.

About 25 percent of the Wisconsin system is funded by employer and employee contributions. The rest is investment income.

Lower income employees and younger workers might like to stop sending nearly 6 percent of their pay to the pension fund, but it would mean a lower benefit if only the employer's contribution and interest income were accumulating, Stohr said. A new law last year required employees to make the contribution, previously covered by government employers.

State officials haven't completed their study of the options so exact numbers aren't available, and its unclear if they will recommend other changes in system structure or benefits, which average $23,000 annually.

401(k) proposal failed

The 401(k) option would make Wisconsin universities more competitive for top academic talent, said Rep. Pat Strachota, R-West Bend, whose bill to provide that alternative fizzled earlier.

The option provides "portability" for those who want to quit Wisconsin public sector jobs and take retirement contributions with them, said Stephen Gawlik, a Denver-based spokesman for TIAA-CREF, a nonprofit insurance provider that lobbied unsuccessfully for Strachota's proposal.

But Sen. Glenn Grothman, also a West Bend Republican and member of the Senate Labor Committee said, "I don't know why an individual employee would not want to be part of the (pension) system."

While most employees choose a defined-benefit pension when given a choice, many who are offered only defined-contribution 401(k) plans often fail to put away money, even when it means they are giving up an employer match, said Keith Brainerd, research director for the National Association of State Retirement Administrators.

Government union and retiree groups are worried that changes would siphon away participants, gradually weakening a system whose strength is drawn from large numbers of people sharing risk and professional investment managers.

"If they go ahead and do that it will slowly destroy the system like carpenter ants destroy your house," said Susan McMurray, a lobbyist for the American Federation of State, County and Municipal Employees union in Wisconsin.

Raging debate

Pension boosters say the systems pool money for shared investment gains that are higher than those earned by individual accounts while keeping elderly off welfare and stimulating local economies through retirees who have money to spend in restaurants and stores.

But representatives of conservative free-market think tanks such as Heartland, the American Enterprise Institute and American Legislative Exchange Council question tax costs and public accounting standards.

ALEC recommends replacing public pension plans with 401(k)-type accounts as a way of confronting unfunded liabilities found in most states. Even Wisconsin's fully funded plan should switch, said ALEC tax and fiscal policy director Jonathan Williams.

Andrew Biggs, a former Social Security Administration official and now resident scholar for American Enterprise Institute, said states that move to 401(k) plans should automatically enroll workers so more will save and stay off welfare in old age.

While individual communities may profit from having pension-plan retirees as residents, the national economy isn't helped overall by pulling money out of private sector pockets through the taxes that seed public pensions, Biggs said.

Compared to other states, Wisconsin's benefits are modest and flexible, and the system is one of very few that is fully funded, Brainerd said.