Lasting pension reform has three pieces: 1) Fund the benefits earned to date. 2) Stop the bleeding and close the current defined benefit plan. 3) Switch workers to a defined contribution-style plan that could include an annuity option and the features of a traditional pension that public sector workers prefer.
Gov. Chris Christie is on tour this summer. The Republican is telling New Jersey residents, there’s “no pain, no gain” involved in fixing the state’s pension problems. And he’s announced that a special commission will be formed to study the issue.
The governor’s right. Pension costs are consuming the budget. This year’s required contribution to fund the system is $4 billion and slated to rise to $4.8 billion by 2018. According to JP Morgan, debt service and retirement costs represent more than 35 percent of the Garden State’s revenues.
But New Jersey’s pension woes aren’t news. For several years economists have warned of large liabilities facing many U.S. pension plans. The recession cast light on years of confused accounting, skipped payments and risk-taking in investment. To be sure, not every state is in the same bucket. With continued policy changes and better accounting, some states will be able to navigate out of the storm. Unfortunately, New Jersey isn’t among them.