Stop kicking state pension problem down the road

The best strategy for shoring up the State Retirement Systems is to convert from a defined-benefit plan to a defined-contribution plan, similar to a 401(k) plan. It will take time, but it is unethical to kick this can of problems onto future generations. We must begin the curing process now.

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This can be accomplished by placing all new hires in a defined-contribution plan, where the state matches their contributions up to a maximum amount rather than guaranteeing a certain payment when they retire. This stabilizes the cost of future hires by eliminating the variations caused by volatile market conditions and mortality rates.

This reduces the obligation problem of the current plan in the long-run by ceasing to add new employees to that plan. Only current employees would remain in the defined-benefit plan, so the state’s long-term obligation dissolves over the remaining lifetime of the youngest current employees.

The defined-contribution plan moves the state from paying less predictable benefits in the future to paying predefined contributions each year to an employee-vested annuity that would be managed by private-sector companies on behalf of each employee directly. The employee owns the funds from the beginning. The state pays annually the full amount of the matching funds and has no further obligation.

The state is already obliged to pay out the promised pensions in the defined-benefit plan and will remain so no matter what other changes are made.

But changing the pension plans for future employees works to slow down the immediate problem and eliminate it over time. That allows the Legislature to work away on reducing this obligation without adding unnecessarily to the burden. It is possible that current employees also could be offered an annuity equal to the present value of their projected future benefits to switch over to the defined contribution plan, further reducing the state’s future obligation.

In the long run, this is best for the state’s citizens and employees.

This story was originally published September 12, 2016 at 5:35 PM with the headline "Stop kicking state pension problem down the road."