Few issues as serious as the pension crunch are equally as dull. Addressing unfunded liabilities and implementing defined-contribution plans simply aren’t compelling calls to arms, despite the widening consensus that the balance sheets of public-sector retirement-benefit systems pose grave threats to state budgets. That’s why the clarity and concision found in this recent “solution paper,” penned by Josh McGee for the Laura and John Arnold Foundation, are so valuable. The piece may be light on detail, but that’s part of the point: It doesn’t aspire to wonky analysis. Instead, it aims right at policymakers and the public in explaining why the set payouts of the traditional defined-benefit (DB) retirement-benefit structure are unsustainable. McGee efficiently makes the case that irresponsible pols inevitably underfund DBs, explains the challenges in projecting their costs, and lays out how they incentivize expensive (and counterproductive) employee behaviors. He then outlines the major cost-saving alternatives on the table—including defined contributions, cash-balance plans, and “stacked hybrids.” (OK, it’s just a little wonky.) There’s far more to this complex topic than McGee includes in this brief paper (case in point: Fordham’s recent study of successful pension reforms), but as an accessible introduction to a vital issue, it’s hard to beat.
Josh B. McGee, Creating a New Public Pension System (Houston, TX: Laura and John Arnold Foundation, 2011).
