The report contends: “The fundamental problem of the current DB system stems from the way benefit promises are made. The system promises an employee a specific benefit without regard to, and without a full understanding of, what it will ultimately cost the state or municipality to provide that benefit.
“The way to create a sound, sustainable and fair retirement savings program is to stop promising a benefit and instead promise an accrual or savings rate.”
The foundation recommends a defined contribution or cash balance plan in place of a defined benefit plan, or one of two other hybrid solutions: a side-by-side hybrid, in which the sponsor maintains both a DB and DC plan and allows employees to choose between the plans; or a stacked hybrid system, in which employees are offered a small DB, meant to provide a minimum amount of retirement security, with a DC stacked on top. Another suggested solution, to cap employer cost at a specific percentage of earnings and specify that the cost of all benefits will be divided equally between employee and employer, “is agnostic about specific plan structure and seeks only to eliminate cost uncertainty,” the report says.
The paper suggests three structural problems that must be addressed in order to create a sound, sustainable and fair retirement savings system for public employees: unpredictable costs, incentive to underfund and labor market distortions. LJAF’s vice president for public accountability initiatives Dr. Josh McGee also outlines key criteria for sound public pension reform: establishment of transparency with respect to the true cost of the benefits promised to public employees; a mandate that the state or municipality pay the full cost of accrued benefits each year; a mandate that the pension plan sponsor pay down the unfunded accrued liability over a reasonable time horizon; and an improvement of the generational equity, portability, and security of benefits for public employees.The paper is available at http://www.arnoldfoundation.org/sites/default/files/LJAF-Pension-Solution-Paper.pdf.