By Cyril Tuohy
Public pension reform should consider elements of defined contribution plans, changing lifestyles and workforce patterns, short-term fiscal challenges and long-term human resource trends, according to a new report by the TIAFF-CREF Institute and the Rockefeller Institute of Government.
The report, titled “Public Sector Pension Reform Addressing Pressing Fiscal Realities from a Long-Term Perspective,” is meant to generate ideas and spur discussion around the reform of the public pension system.
While government defined benefit pension plans operate under strict investment guidelines and are generally sound, critics say the system is outdated and needs to be more flexible. Other watchdog organizations have assailed pension plans for the fees charged by advisors, and even for lagging investment returns.
Lower investment returns and lower tax revenues due to higher unemployment and a slow-growth economy have made it more difficult for governments to meet their future defined benefits pension obligations.
“Plan design is a critical component of reform discussions,” TIAA-CREF Institute senior economist Paul Yakoboski said in a statement. “While many older defined benefit plans were premised on a career employment model in the public sector, that model no longer fits the experience of many current employees and is even less likely to apply in the future.”
Reforms range from adjusting contribution requirements to incorporating defined contribution plan elements into the primary plan structure.
“Public pensions and their financing have been divisive issues in many state and local governments in recent years, and meeting pension obligations will continue to be a challenge in many state and local governments for years to come,” Rockefeller Institute director Thomas Gais said in a statement.
Some pension plans are crushing municipal budgets. New York City, for instance, will pay $8 billion in 2013 toward retirement benefits, a five-fold increase since 2002, according to a recent Bloomberg report.
A separate study of state and local government pensions published last year by the Government Accountability Office found that while most large pensions are sound, many plans face a gap between assets and liabilities as some plan sponsors have not made adequate contributions, or have approved unfunded increases.
Cyril Tuohy is a writer based in Pennsylvania. He has covered the financial services industry for more than 15 years. He can be reached at [email protected].
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