Critical Questions for the Transition to Defined Contribution Pension Systems in the Public Sector

Abstract

Unfunded liabilities of pension plans sponsored by state and local governments have drastically increased in the past few years. This article examines the potential challenges faced by states and municipalities in meeting their pension obligations and explores the cost and benefits of a switch from traditional defined benefit (DB) plans to defined contribution (DC) plans. The authors draw on the experience of the private sector to depict the potential cost savings for governments and the likely impacts on employees. The authors also identify several issues that are unique to governments if a shift in pension coverage plans is to occur. One of the attractions of public sector employment has been the generous benefits offered; the authors examine whether it will be harder to recruit people in the public sector if the government does not offer DB pensions. The authors explore equity issues and the effects of eroding political support for public sector DB systems in light of their demise in the private sector. The authors also address the issue of financial illiteracy in the work place and its impact on the human resource function in the context of DC plan implementation. Finally, the authors pose critical questions regarding DC plan rollout and its inherent difficulties.

Keywords

defined contribution plans public pensions Pension Protection Act financial literacy

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