States that close pension plans face increased costs, retirement insecurity
A new series of case
studies released from the National Institute
on Retirement Security (NIRS) shows that taxpayers’ costs increased when
four states closed their pension plans in favor of alternative plan designs. As
the states shifted new employees from their defined-benefit pension plans to
defined-contribution or cash-balance plans, they did not experience major
improvements in the funding of their existing pensions.
Key conclusions from the research, Enduring Challenges: Examining
the Experiences of States that Closed Pension Plans, include:
- Switching
from a defined benefit pension plan to a defined contribution or cash balance
plan did not address existing pension underfunding, despite claims that such
changes would improve funding levels or slow growing liabilities of the
retirement plans. Instead, costs for the states reviewed (Alaska, Kentucky, Michigan and
West Virginia) increased after closing their
pension plans. - Changing
benefits for new hires does not solve existing funding shortfalls, as the
experience of these states shows. Managing legacy costs is key to responsible
funding of pension plans. - Greater
retirement insecurity for employees has been a challenge due to changes in plan
design, leading West Virginia to reopen its closed pension plan. - Other
workforce challenges, such as difficulty recruiting and retaining public
employees, are emerging as a result of the changes to retirement benefits. In
Alaska, the Department of Public Safety lists the ability to offer a pension as
a “critical need” for the department.
Download the NIRS case studies here.
Defined benefitAlso known as a pension, this is a type of pooled retirement plan in which the plan promises to pay a lifetime benefit to the employee at retirement. The plan manages investments on behalf of members, and the retirement benefit is based on factors such as age at retirement, years of employment and salary history.Defined contributionA type of individual retirement plan in which an employee saves a portion of each paycheck (along with a potential employer match) and invests that money. The employee’s retirement benefit is based on their account balance at retirement. A 401(k) is a type of defined contribution plan.
The illusion on behalf of many critics of plans like PERA is that those who serve the public are not worthy of a retirement plan that does not include them. What is lost is the reality that such a plan does encourage many to serve in the face of low salaries and consistent public criticism. Thank you for sharing the research. Allen Feldman a retired teacher