Causes and Consequences of the Crises in State and Local Pension Funding: Research to Inform the Development of a Road Map for Reform

Abstract

A state or local pension crisis occurs when a pension system faces substantial and persistent underfunding. There is not a single national pension crisis: There are many small crises throughout the United States, reflecting local circumstance, history, and constraints, including legacy pension costs associated with current retirees and former employees. Although concern about the crises surrounding state and local pension systems is not new, much of the research has tended to focus on specific topics, such as the relationship between pension liabilities and the actuarial methods and assumptions used to discount future liabilities, asset portfolio allocation, workforce incentives, and the effects of pension reform. The consequence of a lack of a global perspective is that practitioners aiming to address a pension crisis lack a framework or road map informed by rigorous research and analysis to consider the full extent of the problem, the underlying causes, the consequences, the array of reform options, the impacts of those reforms, and the elements of implementation that are likely to have the greatest chance of success.The objective of this report is to holistically consider the extent and causes of pension crises; the contextual setting, such as legal constraints; and downstream effects, such as the crowding out of public services, financial well-being of public employees, and effective management and retention of the workforce. The aim is to lay the foundation for a road map for reform. We synthesized the available research, data, and resources for the development of a prototype road map for reform, and we supplement this information with insights garnered from discussions with subject-matter experts. This report summarizes the research and findings. The analysis in this report may be of interest to practitioners and policymakers, as well as the research community concerned with the underfunding of public pensions.A companion brief provides a prototype road map to help guide state and local pension policymakers and inform stakeholders about the dimensions of public-sector pension reform and policy options . RAND Education and LaborThis study was undertaken within RAND Education and Labor, a division of the RAND Corporation that conducts research on early childhood through postsecondary education programs, workforce development, and programs and policies affecting workers, entrepreneurship, and financial literacy and decisionmaking. Questions about this report should be directed to Beth Asch,