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Reinventing retirement plans

By Jennie L. Phipps · Bankrate.com
Monday, July 16, 2012
Posted: 5 pm ET

As states struggle to figure out how to reinvent public employee retirement systems at a level that is affordable, the Urban Institute, a public policy think tank, warns against throwing out the baby with the bath water.

Traditional defined benefit pension plans are common in the public sector with 92 percent of state and local government workers having access to one, the Urban Institute reports, while in the private sector, only 23 percent of workers had access to a defined benefit plan, and 25 percent of those people were in frozen plans or plans that weren't accepting new participants.

In a move to save money, states, municipal governments and other public entities are rushing to make public sector retirement planning more like that of the private sector. But in doing so, Urban Institute researchers say they are locking in some of the worst features of both old-fashioned pension plans and newer 401(k) plans.

The researchers used pension reforms by the state of New Jersey to illustrate some of the mistakes they say many states are making. New Jersey has made a huge commitment to retirement plans for current retirees, and it needs contributions from young workers to meet them. But the revised pension plans don't do very much to encourage young workers to take public sector jobs, the study says.

New workers who leave before they've been on the job for 25 years will lose nearly all their retirement benefits. They get back only what they have contributed to the plan with no government matching or interest. After 25 years, pension benefits grow quickly to about four times salary (vs. today's rate of eight times salary). After age 60, benefits decline steadily.

Workers who have 10 or 15 years in the plan have a big incentive to stay -- even if the job no longer fits their skills and interests. And workers who hit age 60 might as well retire right away, even if they would like to work longer.

Reforming retirement isn't easy, but we all have a stake in making sure our governments do it right. We need to encourage the most capable people to become teachers, emergency workers and the efficient administrators of systems we care about.

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2 Comments
KathrynHR
July 17, 2012 at 8:24 am

Jennie,

I heard a lot about DB(k) plans a few years ago when they became available, but nothing since. Have companies begun implementing those or are they largely being ignored? Do the employees who are in them like having them? And if the rules surrounding those plans were amended so that DB(k)s were available to companies with >500 employees, would these be a good alternative for some of these governments that can no longer afford full-blown pension plans, do you think?

Kathryn