Benefits January 18, 2006

The Argument for Terminating Public DB Plans

January 18, 2006 (PLANSPONSOR.com) - The Reason Foundation, in its June 2005 study "The Gathering Pension Storm", recommended terminating defined benefit plans for public employees, arguing that policymakers approve higher pension benefits for selfish, political reasons, creating crises in the pension system and costs to future taxpayers.
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The National Association of State Retirement Administrators (NASRA) has issued a response to the Reason study contending that the Foundation’s arguments are erroneous, chosen from a small example of public pension plans, and do not consider the total effects of switching public retirement systems from DB to defined contribution plans.

NASRA points out that the nine pension systems Reason uses to illustrate the public pension crisis, including San Diego , Illinois, and Detroit, are not representative of the more than 2,000 public pension plans in the US. According to NASRA, “Any community this large is likely to have its share of abuse and excess.” NASRA also notes that, as far as the pension funding crisis, public pension plans, in aggregate are 88% funded, and 70% of public pension plans are funded at 80% or higher.

The falling stock market is the primary factor in the funding crises for plans that increased benefits and lowered contributions at a time when the stock market was performing well (SeeFeature: Their Own Worst Enemy). NASRA notes that investment earnings, and not selfish objectives of lawmakers, had the greatest effect on changes made to employer contributions to public DB plans.

According to NASRA, switching public retirement systems to DC plans instead of DB would involve much cost and have negative consequences, such as the inability of public employers to attract and retain good talent. NASRA argues that the public is best served when judges, firefighters, teachers, and police officers are career-oriented and long tenured, and the DB plan is a central component of the compensation package for such positions.

In its rebuttal to the study, NASRA states, “All else held equal, if the DB plan is taken away, other compensation costs would need to rise.” Losing the strong incentive of a DB plan would require employers to make adjustments to compensation packages that could include improved working conditions, better benefits, or higher pay.

NASRA also contends that reason does not consider the improved financial security of retired public employees. It says that data shows the financial security of Americans in retirement has decreased as a result of the move from DB to DC retirement plans.

Finally, NASRA points to the economic stimulus of public pension assets. “These effects include the investment of pension fund assets in venture capital projects; the added liquidity and stability added by public pension assets to financial markets; and the stimulus provided to the nation’s economy as a result of the additional assets produced by higher investment returns generated by public pension funds,” according to the response.

In conclusion, NASRA states that the focus of the DB plan debate should focus on what plan design could be implemented to meet stakeholder objectives and increase public pension intergenerational equity and transparency of cost, and what positive attributes of DB plans can be extended to private sector workers.

The Reason Foundation study is here .

The NASRA response is here .

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