State’s public policies often act as natural experiments to inform federal actions. In the case of pension reform, the situation is reverse. A recent paper by the Brookings Institution examines the key aspects of the federal pension reform 30 years ago, and analyzes the similarity between the state’s situations now and the federal government’s in the 1980s.
In 1986, Congress created the Federal Employees’ Retirement System (FERS) to replace the old Civil Service Retirement System (CSRS), a defined benefit plan. FERS has three components: Social Security benefits, a smaller defined benefit plan, and the Thrift Savings Plan (TSP), which operates like a 401(k).
The paper shows that the issues faced by the states with underfunding problems today are quite similar to those faced by the federal government back then. Those issues include large unfunded liabilities, political controversy, Social Security coverage, expensive pension costs, and budgetary pressures. The paper identifies four key elements of the federal reform that states can model after:
- Leaving the existing workers in the old defined benefit plan
- Create a new less costly defined benefit plan
- Create a defined contribution plan with generous matching contributions
- Enroll all workers in Social Security.
To read the full paper, go here.