Policymakers face significant liabilities with traditional defined benefit (DB) plans in the government. Unlike defined contribution (DC) plans, the fiscal risks under DB plans are borne by the plan sponsors, that is, state and local governments, and ultimately taxpayers. The Great Recession heightened pension solvency concerns in many jurisdictions, necessitating a reconsideration of their retirement systems. Drawing on Florida municipalities’ plans from 2006 to 2012, we develop an index of pension change and track its evolution. Findings reveal a preponderance of incremental change and suggest the lack of significant change may be a function of high financial costs and status quo bias.
The dramatically increased costs of maintaining many public pension systems after the recent economic downturn have spurred a number of state and local governments to reassess the sustainability of traditional defined benefit (DB) pension plans and to explore reforms. To relieve this fiscal burden, some municipalities have considered implementing defined contribution (DC) plans for some portions of their workforce. This article explores critical issues attendant to implementing this paradigm shift. Utilizing a survey, the authors examine the perceptions of municipal finance and human resource managers regarding this potential transition. Findings indicate that these groups hold virtually identical positions on these issues. Reforms undertaken to bolster sustainability of the DB-centered model may bear unanticipated consequences-both positive and negative-that are largely unexplored given their recentness. Practitioners should prepare for these eventualities.
Incremental changes to amend the existing defined benefit plans (DB plans), and the pension model switch from the DB model to defined contribution plans (DC plans).This study aims to uncover reform strategies to cope for public pension systems. The results suggest that incremental reform strategies that reduce benefits and increase contributions are not effective in improving the financial solvency of public DB plans. The alternative reform approach-the DB-to-DC transition-is attractive to local governments because it will relieve the employer of the pension cost burden and transfer the investment risk to employees themselves. The transition is also politically palatable because the taxpayer sentiment is not supportive of what are perceived to be generous retirement benefit of public employees. Meanwhile, local governments are hesitant to implement the paradigm switch due to prohibitive transition costs, political pressure, and perhaps more importantly, the potential negative impacts to public recruitment and retention. Local officials do not perceive a reduction of morale with the two-tier benefit structure at the present time; they believe this issue will solve itself along the retirement of senior employees.
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