A new series of case studies finds that states that shifted new employees from defined benefit pensions to defined contribution or cash balance plans experienced increased costs for taxpayers, without major improvements in funding. The research also indicates that the move away from pensions cuts employees’ retirement security and that employers may face increasing challenges hiring and retaining staff to deliver public services.
The new research, Enduring Challenges: Examining the Experiences of States that Closed Pension Plans, provides case studies in four states that closed their pension plans in favor of alternative plan designs: Alaska, Kentucky, Michigan, and West Virginia. The report’s key findings are as follows:
- Switching from a defined benefit pension plan to a defined contribution or cash balance plan did not address existing pension underfunding as promised. Instead, costs for these states increased after closing the pension plan.
- Responsible funding of pension plans is key to managing legacy costs associated with these plans. The experience of the four states shows that changing benefits for new hires does not solve an existing funding shortfall.
- Change in plan design has resulted in greater retirement insecurity for employees. In West Virginia’s case, this led the state to reopen the closed pension plan.
- Workforce challenges are emerging as a result of the retirement benefit changes. Alaska is experiencing increased difficulties recruiting and retaining public employees since the pension plans were closed to new hires. The Alaska Department of Public Safety lists the ability to offer a pension as a “critical need” for the department.