Modifying Public Pensions Better than DC Switch

December 6, 2012 ( Closing a public employee defined benefit pension plan can cost substantially more than adjusting an existing plan, a report contends.

The research issue brief, “On the Right Track? Public Pension Reforms in the Wake of the Financial Crisis,” by the National Institute on Retirement Security, says 45 states have enacted defined benefit (DB) pension plan reforms since 2008 to achieve affordability, sustainability and human resource goals rather than switching to defined contribution (DC) plans. The most common public pension plan modifications that have been implemented are increased employee contributions; reduced DB benefits for new hires including changes to retirement ages; and cost of living adjustment reductions for retirees and existing workers.

According to the report, distinct business and labor market dynamics and regulatory pressures led to the decline of pensions in the private sector that do not necessarily apply to governments. A policy of closing or freezing pensions and switching to DC accounts is not necessarily the best approach for government employers and taxpayers.

The report also says freezing or closing DB plans and shifting to DC-only accounts threatens workers’ retirement security, with mid-career employees being the hardest hit. In addition, freezing or closing DB plans and shifting to DC accounts may negatively affect the ability of public employers to recruit and retain qualified workers (see “DB to DC Switch Negatively Affects Public Work Force”).  

Reports in several states, including Texas, Wisconsin and New Hampshire, have documented that DC plans would be more costly than DB plans (see “Texas TRS Finds Other Plans More Costly”).  

The issue brief can be downloaded from here.