A recent opinion piece in Governing argues against state and local governments transitioning their employees from defined-benefit retirement plans to defined-contribution plans. In the analysis of Professor Michael Granof of the University of Texas at Austin, governments can effectively manage defined-benefit plans, which are actually more inherently efficient than defined-contribution plans. The key is strong policy choices.
Policy choices that improve fiscal health of pension plans include continuing to pay in to plans in years when stock market returns are high, and managing “spiking” costs of the system, according to the author. As described,
. . . governments can eliminate provisions that increase payments to retirees but otherwise make little economic sense. These include those that permit “spiking” (the practice by which employees work extensive overtime in their last year of employment to boost the basis on which their pensions are calculated) and that allow employees who retire at a young age to start collecting benefits well before they reach a normal retirement age.
For more information, see the full story from Governing and our previous posts on Conduit Street