On the Right Track? Public Pension Reforms in the Wake of the Financial Crisis

New research examines key factors that have contributed to private and public employers’ pension decisions.  It finds that closing a pension can cost substantially more than adjusting an existing plan. And, scaling back pensions can have destabilizing economic impacts, erode retirement security, and harm the workforce.

The most common public pension plan modifications that have been implemented are increased employee contributions; reduced DB benefits for new hires including changes to retirement ages; and cost of living adjustment reductions for retirees and existing workers. More specifically, the report finds:

• Distinct business and labor market dynamics and regulatory pressures led to the decline of pensions in the private sector that do not necessarily apply to governments.
• A policy of closing or freezing pensions and switching to DC accounts is not necessarily the best approach for government employers and taxpayers. Recognizing this, states are modifying their pensions to ensure long-term sustainability.
• Freezing or closing DB plans and shifting to DC-only accounts threatens workers’ retirement security, with mid-career employees being the hardest hit.
• Because pensions play an important role in public sector compensation, freezing or closing DB plans and shifting to DC accounts may negatively affect the ability of public employers to recruit and retain qualified workers.