Look Before You Leap: The Unintended Consequences of Pension Freezes

Americans are increasingly worried about their retirement security in the face of falling home values, turmoil in the financial markets, and general economic instability. This insecurity can, at least in part, be attributed to the fact that fewer workers and retirees are able to count on a secure, predictable monthly pension, as more employers in the private sector have “frozen” participation in their pension plans.

The trend away from traditional defined benefit pension plans in the private sector in favor of individual retirement savings accounts (such as those found in defined contribution plans) has left Americans especially vulnerable to the volatility in financial markets. With the economy becoming weaker, many state and local governments will be facing fiscal challenges in the months and years ahead.

These challenges will undoubtedly prompt governments to carefully examine all aspects of their budgets, including pension costs for state and local workforces. Policymakers may be wondering, “Are secure retirement benefits for our employees still affordable?” or “Should we consider shifting to a defined contribution approach?”This brief explores important factors public employers should keep in mind when making decisions about their retirement programs.

We conclude that caution should be the watchword for governments that might be tempted to follow the trend in the private sector to abandon defined benefit (DB) pensions in favor of defined contribution (DC) plans.