The Time to Address Public Pension Plan Design Is Now
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Commentary

The Time to Address Public Pension Plan Design Is Now

State and local retirement plans should be modernized to recognize the reality of employee mobility and limit the creation of unfunded liabilities.

While the ultimate impact the coronavirus pandemic and current recession will have on state and local pension plans will not be fully understood for some time, there is little question that this period of fiscal uncertainty and reduced government revenues will have a negative effect on funding public priorities. The effects will not just be felt by public retirement plans but all aspects of state and local budgets. The pandemic and budget challenges should prompt state and local pension plans to conduct thorough reviews and to make substantive changes where necessary.

In a recent interview with Education Week, former Florida Governor Jeb Bush said, “Governors and state legislatures can, and often do, act quickly to solve problems. I encourage them to jump in with bold ideas that can get their education systems moving forward, even better than before.” He added:

“Governors should seize the opportunity to make big changes in times of disruption that are impossible to make when things are going fine. Faced with declining revenues, they should take the opportunity to get rid of what’s not working. They should fund priorities first. If a state has a pension problem, now is the time to make structural changes. Think big and be bold. The pandemic has exposed many weaknesses in our education systems, and the time and the opportunity to address them is now.”

This challenge by Gov. Bush should be embraced by current lawmakers.

Regarding state and local retirement plans specifically, there should be two main areas of structural review and change in plan design to focus on a pension plan’s financials and its effectiveness for all interested parties.

There is an unquestionable need in many jurisdictions for a public pension plan design that limits any further unfunded liabilities. The current unfunded liabilities that have accrued over the past two decades from many actions within and outside plans have the potential to cause tremendous financial instability for the states or municipalities that sponsor them. Market conditions coinciding with the COVID-19 crisis could drive the already dire debt problems to a critical stage for many pension plans.

In many cases, political factors have had far too much influence on the decisions that created unfunded liabilities. This factor is most evident in plans’ sluggishness to adopt more realistic assumptions on investment returns, the largest contributor to the country’s over $1 trillion in pension shortfalls. Going forward, it is important to seek organizational structures that insulate actuarial and managerial decisions from politics.

The second area of opportunity is to review the objectives of pension plans. Every public pension plan sponsor should be asking themselves why they have a plan in the first place. Is that pension plan actually meeting employer workforce needs, providing long-term retirement security, and addressing the needs of other stakeholders? Due to the current design of most public pensions, all too often plans are not serving their central goal of providing a secure lifetime income for plan participants after a career of employment.

This “career of employment” can no longer be defined as an employee’s tenure with one employer. That is simply not realistic in the modern world. State and local government employees, like employees in most any other industries, do not typically stay with one employer for their entire career. Plan designs must recognize the reality of the modern workforce, where employees work for several different employers throughout a career.

Many plans have lagged in adjusting to this change in workforce behavior, simply continuing to offer plans that heap benefits on to long-term workers and limit the value of a retirement plan for those who only stay with the employer for a few years. To remedy this issue, benefit portability must match employee mobility.

Plan designs that recognize the reality of employee mobility and limit the creation of unfunded liabilities do exist today. These plans are structured to withstand unforeseen market downturns, and they address the needs of employers, employees, and taxpayers.

The fiscal effects of the recession and coronavirus pandemic should motivate stakeholders to review and modernize state and local retirement plans. As Gov. Bush implored: “think big and be bold.”  The time to make needed public pension reforms is now.

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