Johnson: Reforming Government Pensions to Better Distribute Benefits – What Are the Options?

From the Introduction:

Efforts to reform the retirement plans provided to state and local government employees are gaining momentum across the country. From 2009 to 2011, 43 states significantly revised their state retirement plans (Snell 2012). Ten states made major structural changes to their plans in 2012 (National Conference of State Legislatures 2013). More recent reforms have passed in such states as Kentucky, Tennessee, and Illinois. These initiatives have been driven primarily by financial concerns. The 2007 financial crisis depleted much of the reserves held by many state and local plans. By their own accounting, plans had set aside enough funds in 2012 to cover only about three-quarters of their future obligations, about a $1 trillion shortfall (Munnell, Aubry, Hurwitz, and Medenica 2013). Outside estimates, based on arguably more realistic actuarial assumptions, put the shortfall much higher (Novy-Marx and Rauh 2011). Absent any reforms this funding gap will likely force state and local governments to increase their payments to pension funds, raising pressure on government budgets and threatening to crowd out other public services or lead to tax hikes. Government contributions to public employee retirement plans have already nearly doubled over the past decade (Johnson, Chingos, and Whitehurst 2013).

 

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