October 11, 2011

From Defined Benefit to Defined Contribution

State Pension Plans and the Need for Reform
  • Scott Beaulier

    Academic Dean, College of Business at North Dakota State University
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Politicians and policy makers across the political spectrum widely agree that state public pension systems across America are broken. The benefit payout promises made to those nearing retirement have been broken again and again, as employees nearing retirement are asked to pay more of their health care costs, contribute more, and work longer in order to secure eligibility. Despite significant benefit reductions in recent years, the worst is still to come for the future retirees and youth now working in public pension systems. The recognition that there is a problem is the first step to recovery, so it is reassuring to see liberal politicians, like California Governor Jerry Brown and New York Mayor Michael Bloomberg and conservative politicians hammering at the idea that the current approach to public pensions is not sustainable.

While legislators agree that there is a problem, their reform ideas are varied and far-ranging. At one extreme, experiments, like those in Utah and Michigan, have replaced defined benefit pension plans with defined contribution plans. At the other extreme, in states like Alabama, Illinois, and Kentucky, legislators have chosen to plow ahead with temporary fixes to the system that will almost certainly prove to be too little, too late.