Beware of Over-Complexity in Pension Plan Reform Efforts
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Commentary

Beware of Over-Complexity in Pension Plan Reform Efforts

Promoting government inaction on public pension reform through the presentation of overly complex data is a strategy that needs to be recognized and rebuffed.

By their very nature, public pension plans are complex. Benefit formulas, funding ratios, employee cohorts, investment strategies, contribution rate stability, Governmental Accounting Standards Board (GASB) principles, and many, many other factors contribute to the complexity of these large pension systems.

Given this intricacy, it should come as no surprise that reforming public pension plans to address growing unfunded liabilities and to better meet the needs of the modern public employee workforce is also a complicated undertaking. The challenge for stakeholders in pension reform is to find, as Oliver Wendell Holmes, Jr., said, “the simplicity on the other side of complexity” in order to enact meaningful change.

There is a real danger that political actors sometimes use this complexity to obfuscate the issues and effectively paralyze public pension decision-makers.

The reality of the need for public pension reform at the state and local government level is rather simple. If a pension plan has much less money on hand than it needs at this time to adequately fund future employee benefits, it needs to undergo reform. Most states find themselves in this position, with some states like Illinois, Kentucky, and Hawaii having less than 60 cents for every dollar that should be set aside now for pension benefits already promised to retirees and workers. Likewise, if the pension plan is not meeting the needs of the modern workforce or its own objectives, it needs to be reformed.

Complexity in studying public pension policy is unavoidable. Detailed actuarial analyses and projections of possible changes or alternate designs cannot be made simple given the list of variables involved.  But these complex analyses should serve as technical support for stakeholders and the solutions themselves should be direct, straightforward and concise.

The group of stakeholders responsible for enacting meaningful pension reform includes legislators, staff, local elected officials, and public employees themselves, among others. By and large, most individuals representing these groups are not retirement professionals or pension plan design experts. These decision-makers are advised by subject matter experts including public pension policy organizations, financial services professionals, employee union representatives, and trade groups for retirement system directors.

Experts need to be very careful that they do not use the inherent complexity of the issues to spur purposeful inaction or to push reforms that are not meaningful but that support a specific agenda. To do so is potentially dangerous to the long-term financial health of the plans and to the retirement security of public employees themselves.

The purposeful over-complication of pension policy can be achieved in several ways. One often-seen method is to use complex and confusing data presentations to suggest that a pension system’s problems are not really ‘that’ bad. Another tactic is to pile many new pension plan design complexities upon complexities to conclude that leaving the plan as it currently is the only realistic direction, even if this means moving towards a pay-as-you-go arrangement.

The potential pension reforms and solutions recommended to decision-makers should be clear and straightforward yet supported by the complex analyses discussed above. Promoting government inaction and protecting the status quo through the presentation of overly complex data is a strategy that needs to be recognized and rebuffed. In taking on state and local pension reform, decision-makers must demand the simplicity on the other side of complexity and pension experts must step up and provide it.

Richard Hiller is a senior fellow with Reason Foundation's Pension Integrity Project.