Cities’ and states pension problems are urgent, but they are not impossible to fix. After years of treating pension liabilities like debts that would never have to be paid, elected officials on both sides of the aisle have begun to understand the pressing need for change. Many now realize that they must take a balanced approach to solving this problem, as opposed to simply ignoring it or making indiscriminate cuts that create an unfair burden for any single group of stakeholders. In order to protect workers and taxpayers, responsible reforms should be guided by three core principles.
1. Pension plans must place all workers on a path to a secure retirement.
Traditional Defined Benefit plans are shortchanging workers and failing to meet the needs of state and local governments. Politicians should adopt systems for new workers that protect public servants and are less complex and easier to manage. These systems should ensure that workers are able to accumulate adequate retirement savings; have access to professionally managed, low-fee investment options; and have the option to receive lifetime annuity payments upon retirement. In addition, governments should consider enrolling public employees in Social Security.
2. Governments must establish responsible funding and investment policies that promote fiscal sustainability.
Adequate pension funding should be non-negotiable. Governments should commit to paying down their legacy costs in 20 years or less as recommended by the Society of Actuaries Blue Ribbon Panel on Pension Funding. Going forward, governments should establish policies that allow them to pay down any additional debt that is accrued within five years or less to avoid costly periods of compounding interest. In order to ensure that pension funds remain financially viable, policymakers should also establish prudent investment policies that take into account the possibility of economic downturns and governments’ ability to cover lower-than-expected investment returns.
3. Governments must improve public pension governance and reporting to promote transparency and accountability.
Governments should strengthen plan reporting requirements so that policymakers have the information they need to make informed decisions and so that workers and taxpayers can hold officials accountable for prudent, fiscally sustainable pension plan management.