Study Lauds Merits of Future Public Pension Reform

Mercatus: For stability, move from defined benefit to defined contribution plans

MacIver News Service | October 6, 2011

[Madison, Wisc…] Wisconsin public workers might find themselves paying even more towards their pensions, unless the state moves from a defined benefit model to defined contribution, according to a recently released study by the Mercatus Center at George Mason University.

The study looked at pension funds across the country, many of which possess high levels of unfunded liability.

Wisconsin has been fortunate with its state pension fund, which is recognized by many as among the best managed in the country. The same cannot be said, however, for every public employee plan in the state.

Moreover, the Mercatus paper points to a combination of factors that could even affect funds like the State of Wisconsin’s, including weak and unpredictable financial market performance and a higher beneficiary to worker ratio in years to come.  Other states have already had to compensate for these factors.

“The rise in employer contributions, a cost largely passed on to taxpayers, has been accompanied by rising employee contributions, too. Combined with employee contribution rates, most public plans require contribution rates that exceed 20 percent of earnings,” the report reads.

The Marcatus Center report suggests many of these problems can be addressed by switching from “defined benefits” (output) to “defined contributions” (input).  Retaining the current system could result in dire consequences.

“To say the defined benefit public pension model in America is in crisis and on its last legs is an understatement: the system has failed, and it will support future participants through a series of broken promises, pay cuts, and taxpayer bailouts,” according to the report.

Earlier this year, Governor Scott Walker proposed and the legislature approved conducting a study about the State’s Retirement System.

According to an analysis by the nonpartisan Wisconsin Legislative Fiscal Bureau the state will:

Require the Secretary of the Department of Administration (DOA), the Director of the Office of State Employment Relations (OSER), and the Secretary of ETF to study the structure of the Wisconsin Retirement System and benefits provided under the Wisconsin Retirement System. Require the study to specifically address the following issues: (a) establishing a defined contribution plan as an option for participating employees; and (b) permitting employees to not make employee-required contributions and limiting retirement benefits for employees who do not make employee-required contributions to a money purchase annuity calculated under current law provisions.

Those findings and recommendations are due by the end of next June.

Michigan switched to the defined contribution model in 1997, and seen great success in its pension fund.

“Unlike defined benefit plans, which are frequently underfunded, Michigan’s program is fully funded and employees have never missed out on a payment,” accordng to the Mercatus paper. “Members of the Michigan State Employees Retirement System defined benefit plan prior to 1997 are still being paid, but Michigan’s reform reduced unfunded liabilities by billions of dollars.”