RELEASE: Taxpayers Benefit Most from Modest Reforms to Defined-Benefit Pensions
Washington, D.C. — Today the Center for American Progress Action Fund released a new analysis finding that making minor reforms to the current defined-benefit pension system, rather than overhauling the system entirely, is the most cost-effective option for taxpayers. The analysis, "In Defense of Defined-Benefit Pensions" by David Madland and Nick Bunker, discusses the advantages and disadvantages to taxpayers of the major types of retirement plans, reviews the current level of pension shortfalls, and provides guidance for future action.
Because many states’ public employee pension plans are currently underfunded—meaning that current assets are less than promised retirement benefits—proposals to drastically reshape public-sector pensions or eliminate them in favor of 401(k)-style retirement plans are expected to be introduced in statehouses across the country. While proponents argue that these alternative defined-contribution plans are good for taxpayers, in most cases taxpayers are better off making minor reforms to the current system.
The analysis explains that the defined-benefit pensions held by public employees are much more cost effective than 401(k)-style retirement plans. Because defined-benefit plans have higher returns, more balanced portfolios, and a greater ability to pool risk, they cost roughly half as much to provide the same level of retirement benefits to public-sector workers.
The report’s authors provide the following recommendations for state legislators considering reform proposals:
- Relatively modest changes to public pension plans—such as to increase contributions from employers and workers—should significantly correct the underfunding problem that many plans currently face.
- Adopting best practices—such as requiring states to make annual contributions that reflect their share of plan costs—can shore up most defined-benefit plans for the long haul, and minimize the need for having to make additional contributions in the future.
- Eliminating defined-benefit pension plans and switching to 401(k)-style defined-contribution plans will not save money because dollar for dollar, defined-benefit pension plans are much more efficient.
- Hybrid proposals that attempt to combine elements of defined-benefit pensions and defined-contribution plans are unlikely to provide short-term cost savings, though they do hold some promise for managing the downsides of both types of plans.
“Taxpayers need to know that defined-benefit pensions are less expensive than 401(k)-style plans for the same level of benefits,” said David Madland, Director of the American Worker Project. “Taxpayers will end up paying more if defined-benefit pension plans are eliminated.”
To speak with the authors of this report, contact Katie Peters at email@example.com or 202.741.6285.