Is the golden age of pension reform upon us? Alicia Munnell recently argued that it is, or something close to it. Munnell is the director of the Center for Retirement Research at Boston College, and one of the leading experts on retirement policy in America. In a column published in mid-July, she directed naysayers to regard the many recent examples of public pension systems that have increased contribution rates for current employees or reduced their benefits. These three images from a presentation by the National Conference of State Legislatures show that the former has been much more common than the latter. (For over ten years now, the NCSL has done yeoman's work in tracking state-level pension changes.)
The green in the first image shows how many states have taken action in some way or another. The green in the second, contrasted with the yellow and pink (rose?) of the third, illustrates the gap between states targeting contribution rates vs. actual benefits. This is because, as Munnell notes, "while constitutions and state laws preclude benefit changes, they usually place no restrictions on how much the state can ask the employee to pay."
But, wait, what difference does it make between asking someone to pay more for a benefit and reducing its value?
From a policy perspective, it makes a big difference, because employee contribution rates, just like employer contribution rates, are determined by actuarial assumptions about rates of return. Say a "50/50" employee/employer cost sharing arrangement is determined based on the assumption that their collective contributions will earn 7-8% compounded over a 20-30-years. If the rate turns out to be lower, then it won't be quite 50/50, will it? If the benefit is not reduced, the employer/taxpayer will surely end up paying more than 50%.
A study published in August by the California Public Policy Center found that the average total compensation package of a San Jose worker differs by at least $20,000 depending on whether a 7.5% or 5.5% rate of return is assumed.
Hence, although in principle there should be no difference between reducing benefits or increasing contributions, it would make for better public policy if governments could simply adjust benefits. Until they acquire this freedom, the golden age of pension reform will remain out of reach.