Creating a New Public Pension System

Few issues as serious as the pension crunch are equally
as dull. Addressing unfunded liabilities and implementing defined-contribution
plans simply aren’t compelling calls to arms, despite the widening consensus
that the balance sheets of public-sector retirement-benefit systems pose grave threats to state budgets. That’s why the
clarity and concision found in this recent “solution paper,” penned by Josh
McGee for the Laura and John Arnold Foundation, are so valuable. The piece may be
light on detail, but that’s part of the point: It doesn’t aspire to wonky
analysis. Instead, it aims right at policymakers and the public in explaining
why the set payouts of the traditional defined-benefit (DB) retirement-benefit
structure are unsustainable. McGee efficiently makes the case that
irresponsible pols inevitably underfund DBs, explains the challenges in
projecting their costs, and lays out how they incentivize expensive (and
counterproductive) employee behaviors. He then outlines the major cost-saving
alternatives on the table—including defined contributions, cash-balance plans,
and “stacked hybrids.” (OK, it’s just a little wonky.) There’s far more to this
complex topic than McGee includes in this brief paper (case in point: Fordham’s
recent study of successful pension reforms), but as an accessible
introduction to a vital issue, it’s hard to beat.

Josh B. McGee, Creating
a New Public Pension System
(Houston, TX: Laura and John Arnold
Foundation, 2011).

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