Pension Policy Brief Series

This brief summarizes the policy analysis results of our previous three briefs. The reform considered here addresses governance through a structure to bring predictability (not stability) to pension contributions and retirement income. The idea of predictable, but not fixed, contributions and retirement income lies behind the fiscally solvent public pension systems such as Wisconsin and South Dakota. Read this policy analysis summary.

In this brief, we consider the impact of closing the DB plan on the remaining three constituencies: retirees, current public employees and taxpayers. Read more about Current Workers and Retirees.

This brief continues our analysis of public pension policy through the lens of the lifecycle model. We build on our previous brief by assuming (for illustrative purposes) that the plan is closed. We then explore the impact on future generations of unfunded pension liabilities. Read more about Public Pensions and Future Generations

In this brief, we evaluate public pension policy tradeoffs in terms of their impact on economic welfare of newly hired public employees. We examine a hypothetical policy change: switching new employees from the existing Defined Benefit pension system to a Defined Contribution

system. In our example, wage increases of between 11% and 14% make the new hire indifferent between the legacy DB system and a DC system, contingent on the COLA policy. Read more about comparing DB and DC plans.

The pension funds in South Dakota and Wisconsin have long track records of fiscal solvency. They have achieved this by maintaining contributions to the pension system, and by incorporating a degree of rules-based benefit flexibility. These steps were facilitated by a

legislative commitment to full funding. The experiences of these states offer important lessons for would-be pension reformers. Read more about good pension fund governance.

Low levels of interest rates have rekindled interest in using Pension Obligation Bonds (POBs) as a tool to resolve funding challenges for US public pension plans. Our analysis suggests that under current governance, POBs only resolve funding challenges over the short term.

Furthermore, under our assumptions both taxpayer and beneficiary economic welfare is adversely affected by POBs. Hence, unless bond issuance is accompanied by structural changes in governance, they are a bad idea. Read more about why pension obligation bonds are a bad idea.

This brief shows how pension reform without a change in the rules-of-the-road is doomed to failure. For public pensions, policymakers can influence three main variables: the rate of contributions, the target return on investments, and the level of benefits. As distinct from other pension systems, policymakers are able to choose levels for these variables without explicit reference to market pricing. This ability, coupled with governance rules that require short-term balanced budgets, almost guarantee weak pension finances. Read more about revisiting why pension reform is so hard.

The single biggest issue for public policy design is the misalignment of interests between policymakers and other constituencies. The short-term budget constraints faced by policymakers are at odds with the long-term interests of taxpayers and beneficiaries. Using analytic frameworks, policymakers, union leaders, and other stakeholders can analyze the welfare and state budget implications of alternative pension policies. Read more about why public pension reform is so hard.

For decades, the enormous costs of providing public pension benefits to retiring baby boomers have been discernible but too-often deferred – in the United States and across the world. Yet other developed nations, from Canada to Sweden and the Netherlands to New Zealand, have done more than the U.S. to ensure that retirement promises will be kept. It’s too late for the U.S. to catch up, but other countries – and a few states – offer lessons worth following on setting the rules of public pensions, aligning the interests of the young and the old, and balancing the stakes of taxpayers and public employees. Read more about solving practical issues in pension design.

Using the model developed in earlier briefs, the welfare consequences of Rhode Island’s recent pension reforms are analyzed. This stylized example suggests that Rhode Island-style pension reform can improve

economic welfare for both taxpayers and beneficiaries. In this example, the gains in welfare accrue most heavily to the young cohort of public employees and taxpayers. Read more about how public pension reforms can improve economic welfare.

This analysis focuses on how public pension policy choices impact taxpayers. It begins by finding a wage increase that makes public employees indifferent between defined benefit and defined contribution plans. There are potential gains for taxpayers when a defined contribution plan is used instead of a defined benefit plan. Those gains arise because taxpayers are funding lower levels of insurance against adverse asset market events. Read the full policy brief.

With the largest generation of pensioners in U.S. history heading for life after work, the stress on all manner of retirement plans grows more obvious by the year. The greatest good for the greatest number – past, present and future – demands changes in behavior by young and old. Fresh strategies for government and private enterprise are needed. A few states and several other countries offer models to emulate. Read the full policy brief.

For decades, the enormous costs of providing public pension benefits to retiring baby boomers have been discernible but too-often deferred – in the United States and across the world. Yet other developed nations, from Canada to Sweden and the Netherlands to New Zealand, have done more than the U.S. to ensure that retirement promises will be kept. It’s too late for the U.S. to catch up, but other countries – and a few states – offer lessons worth following on setting the rules of public pensions, aligning the interests of the young and the old, and balancing the stakes of taxpayers and public employees. Read more about possible solutions to these practical issues.

The foundation of better pension systems should, in part, be based on lifecycle portfolio choice models. These models provide clear guidance for policymakers on how to promote higher savings rates, foster appropriate investment risk-taking during working years, and encourage an alignment of institutional and individual discount rates. Read more about lifecycle portfolio choice and pension design.