Public pension plans across the country are reeling from billions in investment losses during the global financial crisis, leaving public employees in states and cities wondering whether governments will ultimate renege on their retirement promises.

According to a Washington Post story on Sunday:

The upheaval on Wall Street has deluged public pension systems with losses that government officials and consultants increasingly say are insurmountable unless pension managers fundamentally rethink how they pay out benefits or make money or both.

Within 15 years, public systems on average will have less half the money they need to pay pension benefits, according to an analysis by Pricewaterhouse Coopers. Other analysts say funding levels could hit that low within a decade.

So add retirement fears to the worries of Hawaii’s state and county workers, already dealing with furloughs, understaffing, and layoffs.

But that’s not all. Between now and April 3 of next year, public workers in Hawaii have to decide whether to pay now to “upgrade” their benefits and increase future retirement payments they hope to receive from the State Employees’ Retirement System.

It’s a decision that will have lasting consequences, but there are many moving parts, lots of uncertainty, and lurking in the background the threat that the financial shortfall facing the retirement system will cause future shakeups that could make all the best planning assumptions obsolete.

For those without resources to pay for the “upgrade” in benefits, the choice will be simple. They’ll keep their current level of benefits. For others, the choice will be much harder.

State and county employees currently are in either the noncontributory plan, which does not require a monthly payroll deduction, and the so-called “hybrid plan” or “contributory plan”, which requires a small monthly payment by the employee.

The difference is in the eventual monthly pension after retirement.

Noncontributory plan members receive payments of 1.25 percent of their average final compensation (the so-called “high three”) for each year of qualifying employment, while contributory or hybrid plan members will get 2 percent for each year of service.

What the current “upgrade” program provides is a one-time chance to convert prior service to the higher-payback contributory plan via a cash payment.

The Employees’ Retirement System has set up a web site accessible only to qualifying members with information about the choice, Questions & Answers, and some examples of typical situations.

For some employees, the choice will be consequential.

Take one example provided by the ERS. “Lori” is a single 65-year old supervisor with 36 years of prior employment, including 33 noncontributory years and 3 years in the hybrid plan. She plans to retire soon.

If she does not upgrade, she looks forward to monthy pension payments of $2,798.50.

But by upgrading 17 years of noncontributory service, she can increase her monthly benefit to $3,538.

In this example, the cost of upgrading 17 years would be $105,716.88, which can come from a deferred compensation plan, rollover of certain IRA accounts, or from savings.

In this example, Lori would have to earn nearly 8.4% on that $105,716.88 in savings, year after year, to get the same monthly boost in monthly income. Given the variability of the stock market and other investments, the stable return from the ERS seems very attractive.

But…the ERS web site contains an important caveat:

Because the calculations you generate are based on assumptions, you should not rely upon these calculations as an official ERS estimate or projection of your future retirement benefits, as the calculations are not intended to show you what your actual benefits will be at the time of your retirement. The calculations shown here are only provided to help you evaluate your Upgrade Program options. Your actual benefits at the time of your retirement will be based on and calculated in accordance with the then-applicable State of Hawaii and ERS statutes, rules, policies and procedures, using data (salary, membership service, and other factors) that is received and verified at the time of your retirement. Nothing on this Website amends, modifies, overrides, or nullifies any State of Hawaii or ERS statutes, rules, policies, and procedures that are applicable to your retirement, or any of the data in your ERS records.

In other words, the laws and rules could change in the future.

The ERS has scheduled a series of informational meetings statewide. Clearly public workers are going to need as much information as possible to make this election.