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New Case Study Finds Increased Costs When Employee Pension Plans are Closed

NEW CASE STUDIES FIND INCREASED TAXPAYER COSTS WHEN STATES MOVE EMPLOYEES OUT OF PENSION PLANS

A new series of case studies finds that states that shifted new employees from defined benefit pensions to defined contribution or cash balance plans experienced increased costs for taxpayers, without major improvements in funding. The research conducted by the National Institute on Retirement Security also indicates that the move away from pensions cuts employees’ retirement security and that employers may face increasing challenges hiring and retaining staff to deliver public services.

The new research, Enduring Challenges: Examining the Experiences of States that Closed Pension Plans, provides case studies in four states that closed their pension plans in favor of alternative plan designs: Alaska, Kentucky, Michigan, and West Virginia. The report’s key findings are as follows:

  • Switching from a defined benefit pension plan to a defined contribution or cash balance plan did not address existing pension underfunding as promised. Instead, costs for these states increased after closing the pension plan.
  • Responsible funding of pension plans is key to managing legacy costs associated with these plans. The experience of the four states shows that changing benefits for new hires does not solve an existing funding shortfall.
  • Change in plan design has resulted in greater retirement insecurity for employees. In West Virginia’s case, this led the state to reopen the closed pension plan.
  • Workforce challenges are emerging as a result of the retirement benefit changes. Alaska is experiencing increased difficulties recruiting and retaining public employees since the pension plans were closed to new hires. The Alaska Department of Public Safety lists the ability to offer a pension as a “critical need” for the department.

Download the case studies here.

“These case studies are cautionary tales for policymakers considering changes to employee retirement plans in their states,” said Dan Doonan, National Institute on Retirement Security executive director and report co-author.

“The data make it clear that closing a pension plan to new employees increases taxpayer costs and doesn’t close any funding shortfalls. What’s important to understand is that switching away from pensions starves the plan of employee contributions while the liabilities remain. This can reduce the economic efficiencies of a pension system as the number of retirees grows compared to the number of employees paying in. Ultimately, taxpayers are left with the bill. Moreover, such a switch undermines employees’ retirement security and triggers workforce challenges for employers,” he explained.

“It’s our hope policymakers and stakeholders will carefully review the data and experiences in Alaska, Kentucky, Michigan and West Virginia as they consider any retirement plan design modifications,” he said.

In Michigan, the State Employees’ Retirement System (SERS) pension plan has been closed for more than 22 years with all new-hires participating in a defined contribution plan. When the SERS pension plan closed in 1997, the plan was actually overfunded with 109 percent of assets. As of September 30, 2017, the plan was only 66.5 percent funded and had an unfunded liability of $6 billion. And, the system now must be managed with 6 retirees per worker.

Each analysis examines the key issues and the impact of the plan change over time. Specific areas include: the impact on the overall demographics of the system membership; changes in the cost of providing benefits under the plan; the percent of the actuarially determined employer contribution made by the state and other public employers each year; the effect on the retirement security of workers impacted by the change; and the impact on the overall funding level of the plan over time. To the extent possible, the case studies also examine subsequent action taken by policymakers to address the results of the plan changes.

The National Institute on Retirement Security is a non-profit, non-partisan organization established to contribute to informed policymaking by fostering a deep understanding of the value of retirement security to employees, employers, and the economy as a whole. Located in Washington, D.C., NIRS’ diverse membership includes financial services firms, employee benefit plans, trade associations, and other retirement service providers. More information is available at  www.nirsonline.org. Follow NIRS on Twitter @NIRSonline.  

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