Pension Reform News: What today’s workers need from retirement plans

In This Issue:

Articles, Research & Spotlights 

• Pensions Require Modernization to Serve Modern Public Employees
• Georgia’s Teacher Pension Makes Improvements, But Needs More

News in Brief
Quotable Quotes on Pension Reform
Contact the Pension Reform Help Desk

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Articles, Research & Spotlights

Why Defined Benefit Plans Fail the Majority of Public Workers

Most public employees are offered a pension as the primary retirement option, but the evolution of workforce expectations and behavior suggests that lawmakers should consider adjusting and expanding upon these options. Reason Foundation’s Mariana Trujillo uses recent research—a retention analysis of multiple plans and a benefit analysis that compares a defined benefit to a defined contribution plan in Alaska—to examine how pensions serve today’s modern, more mobile public workforce. Trujillo’s findings highlight significant shortcomings that make one-size-fits-all pensions a poor fit for most new teachers and public workers.

The Need for Reform for Georgia’s Teacher Pension

Despite several prudent adjustments to actuarial assumptions, the Teachers Retirement System of Georgia (TRS) has yet to see much progress in improving the funding of its promised pension benefits. According to the latest reporting, the system has only 78% of the funds needed to pay for promised pension benefits, and the plan’s debt has grown to $27.7 billion. In a commentary for the Georgia Public Policy Foundation, Reason Foundation’s Jen Sidorova finds that new tweaks to return assumptions and debt payment schedules help, but more reform is needed to get TRS back on track. She explains that policymakers should consider accelerating paying down the system’s debt even more to save future budgets from unnecessary interest costs. Also, with extremely high vesting requirements (10 years), most teachers entering TRS are unlikely to qualify for the pension benefit, meaning very few generate adequate savings for retirement. Georgia lawmakers need to consider modernizing TRS to reduce excessive debt-related costs and to ensure teachers are building enough savings for retirement during their time as educators.

News in Brief

Best Practices for Lump-Sum Buyouts

A recent issue brief by the American Academy of Actuaries explores the growing trend of public pension plans offering lump-sum buyouts to members in exchange for their future pension benefits. A typical program offers a buyout amount equal to a percentage of the present value of the annuity benefit. The brief warns that members face challenges comparing the differences in the value of a one-time, lump-sum payment to a lifetime of pension benefits, often subject to cost-of-living adjustments (COLAs). It advises plans to explain how the buyout amount is calculated, including the present value of their future benefits and the percentage of that value represented by the lump sum offer. The brief suggests that members should receive estimates of the cost to replace their pension benefits in the private market and the required investment return on the lump sum to replicate the lost benefits over their expected lifetime. The full brief can be found here.

Pension Liabilities Forced California Cities To Reduce Spending and Public Safety Hiring

A recent paper by Tyler Ludwig at the University of Texas analyzes the fiscal pressure imposed on California cities by their defined benefit (DB) pension systems. Using data from 2003 to 2016, the study explores how increases in pension liabilities affect municipal budgets, public services, and employment. The findings highlight that cities primarily cut non-current expenditures, such as capital investments, and reduce payrolls, specifically in public safety, to meet rising pension costs. Ludwig finds that, on average, a $1 increase in unfunded pension liability costs leads to a $0.43 rise in current expenditures but results in a $1.14 cut in non-current spending. Furthermore, for every $1 increase in pension pressure, cities reduce police employment by 0.07 jobs per 100,000 residents. The full paper can be found here.

Long Duration Bonds Improve Public Pensions Outcomes Under Stress

A new issue brief by analysts at MetLife Investment Management highlights the benefits of long-duration U.S. government and corporate bonds in public pension portfolios. These bonds serve multiple functions, preserving capital, providing predictable cash flows, and enhancing liquidity during market stress. With an annualized return of 5.6% since 1994 and a low corporate default rate (0.08% annually on average from 1994 to 2023), long-duration bonds offer a reliable way for public pensions to meet their obligations. The bonds also provide capital efficiency, requiring fewer assets to generate the same returns as broader market bonds, allowing for a higher expected return and funded status for pension plans. Stress tests show that replacing traditional bonds with long-duration options improves public pension portfolios, especially in market downturns. The brief emphasizes the strategic use of long-duration bonds for risk reduction and liquidity in public pensions. The full brief can be accessed here.

Quotable Quotes on Pension Reform 

“If I had $67 billion sitting around that I wanted somebody to invest, it probably wouldn’t be somebody who said, ‘Hey, I think I can do this, I’ve never done it before, but I think I can do this’…I would want somebody with a track record and somebody with some solid experience.”

— Ohio Attorney General Dave Yost, quoted in “Ohio teachers’ pension fund chair still considering deal with controversial firm at center of scandal,” News5 Cleveland, Aug. 30, 2024.

“It’s kind of a drop in the hat when you’re looking at $150 million of (a funding gap). But at the same time, we have to start somewhere, and this is a good start.”

— Zachary Privette, president of the Columbia Professional Firefighters, quoted in “City Council planning to inject $1 million to shore up police, fire pensions,” Columbia Missourian, Sept. 5, 2024. 

“The incentive to attract new young recruits is going to not be nearly as pronounced if you’re looking at a pension fund that isn’t well funded, and then you can go to a different municipality and see that it’s much more healthy.” 

— Laura Goodloe, Forest Park’s pension board attorney, quoted in “Underfunded pensions affecting current firefighters and recruits, officials say,” Forest Park Review, Aug. 27, 2024.