Commentary

Myth and Muddle Blocking Pension Reform

When it comes to public pension debates, few myths are as enduring as the “transition costs” myth. Reason Foundation economist and pension expert, Anthony Randazzo, devoted a major article debunking the myth here, and the fallacy has briefly discussed here. In a recent interview with Michigan Capitol Confidential, Randazzo outlined the key points regarding the misconception:

Randazzo: The myth is based on two mistaken assumptions that certain steps need to be taken when switching from a defined-benefit system to a defined-contribution system. They are:

(1) That government must start making bigger debt payments to the defined-benefit system after it is closed.

(2) That a defined-benefit system needs new members in order to keep it solvent.

Neither of these assumptions are true. Regarding the first mistaken assumption, it might be recommended that a government increase the size of its debt payments after the system has been closed in order to pay off the debt sooner, but there is no legal requirement that it do so.

Regarding the second mistaken assumption, defined-benefit systems are supposed to be fully funded on a yearly basis by employer and employee contributions plus investment earnings. These systems are not based on new workers subsidizing older workers.

Randazzo then rightly argued that a defined contribution (DC) system is “100 percent more transparent than a defined benefit system” since the DC system does not require any actuarial assumptions about the future, and annual costs are straightforward, without any contingent obligations on future taxpayers.

To read the whole interview, go here.

Lance Christensen is the former director of Reason Foundation's Pension Reform Project.