Critics of pension reform often claim that switching away from traditional defined benefit (DB) pension plans will weaken retirement security and save little money for taxpayers. The Urban Institute’s recent study on Rhode Island’s 2011 reform, which replaced the state’s DB pension with a hybrid plan, shows a different story. Comparing retirement benefits that newly hired public school teachers will receive under the new hybrid plan with the benefits they would have received under the old DB plan, the study indicates that 78 percent of the teachers, including nearly three quarters of those remaining employed for at least five years, will receive more retirement benefits at age 67 from the new plan than the DB plan. Moreover, two thirds of all newly hired teachers will earn more lifetime retirement benefits, net of employee contributions, under the hybrid plan than the old plan. The new plan will also reduce taxpayers’ costs of providing retirement benefits for new hires by one-third.
Besides higher benefits for most employees, the new hybrid plan is also a more equal system, which increases benefits for those who would have received diminished pensions and reduces benefits for those who would have received generous pensions. Under the old plan, less than full-career members gained essentially nothing out of future pensions as the benefits were often worth less than the value of their own required contributions. Furthermore, refunded contributions did not earn interest, making those teachers with short-careers effectively subsidize teachers with long-career. The new hybrid plan, with its defined contribution (DC) component, is less “backloaded”, and thus will bring about a more equal benefit distribution. Thanks to the DC component, the new plan is more suitable for the modern workforce since it provides more portability and rewards work at older ages.
Most long-tenured teachers however will not receive the generous benefits previously offered under the new plan. Nonetheless, most will remain financially secure at retirement, as the typical teacher retiring after at least 35 years of service will have about 90 percent of his/her preretirement earnings replaced by Social Security and pension benefits.
To read more about the study, go here.