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Six Plans Show That Common-Sense Pension Reforms Work

The news coverage of state and local pension programs in recent months has been unremittingly negative, so it’s refreshing to read a new report by the National Institute on Retirement Security (NIRS) — a non-partisan research institute — that looks at some plans that are functioning well and explains what they’re doing right.

These plans, which cover state and local employees in Delaware and Idaho, municipal workers in Illinois, and teachers in New York State, North Carolina, and Texas, aren’t doing anything radical.  They’re simply following common-sense policies similar to the ones we recommended in our own recent report.  NIRS identified the following good practices in these six states:

  • Employers regularly pay the annual required contribution. In good economic times, it can be tempting for states to skip pension contributions and instead allow the pension funds’ investment earnings to cover employees’ accrued pension costs.  NIRS found that sound pension plans don’t do that — they require employer contributions even in good economic times so they don’t have to require larger contributions in bad times.
  • Employees share in the cost of the plan. Consistent employee contributions – which most public pension plans require – make pension funding more stable.  (Of course, requiring employees to contribute reduces their take-home earnings, so their salaries need to be adequate for that.)
  • Rules are in place to help prevent uncommon but damaging abuses. Well-funded plans reduce the opportunities for “double-dipping” (where, for example, a person claims a public pension while continuing to draw a government salary) and “spiking” (where employees artificially inflate their final year’s earnings in order to boost their pensions).  Anti-abuse provisions generally don’t save a huge amount of money because the problems are now relatively rare.  Nevertheless, eliminating them makes the system fairer to other public employees and can forestall the overblown claims that public pensions in general are bloated and undeserved.
  • The plan funds any benefit improvements at the time it adopts them. Well-funded plans make sure to accurately determine the current and future cost of any proposed benefit increases.  And by paying for these increases at the time of adoption, they avoid incurring commitments that later prove unaffordable.
  • Annual cost-of-living adjustments — known as COLAs — are limited and are funded when granted. Cost-of-living adjustments are an important feature and prevent pension benefits from eroding over time.  They can, however, be costly, so well-run plans take care to project those costs accurately and identify adequate funding in order to avoid making unaffordable promises.
  • The plan regularly revisits its assumptions regarding the return on its investments. Periodically reevaluating these and other assumptions can help a plan ensure that current contributions are adequate to meet the plan’s funding goals over the long term.  Strong pension funds report on the regular reviews of these assumptions in order to increase transparency.

The NIRS analysis shows that common-sense policies like these work, even during turbulent economic times.  While the most severely underfunded state pension plans will require more radical changes, the measures outlined above — if faithfully followed — should be sufficient to allow most states and localities to maintain retirement security for their employees without destabilizing their budgets and undermining their ability to fund education, health care, infrastructure, and other public services necessary to maintain strong economies in both the long and the short term.