Contribution volatility and public pension reform

Abstract

In the wake of the economic downturn of [2008][2009], researchers and policymakers have focused considerable attention on the extent of unfunded liabilities in US public sector pension plans and the implications for the long term fiscal sustainability of state and local governments. In response to the growth in liabilities, many states have introduced legislation that cuts back on defined benefit (DB) plan commitments, in some cases even shifting the pension system from a DB to a defined contribution or hybrid plan. This paper explores the factors that have led states to engage in pension reform, focusing particular attention on one factor that has only recently gained attention in the research literature: contribution volatility. While unfunded liabilities have significant long-term solvency implications, in the short term fluctuations in the amount of required contributions pose substantial difficulties for the ability of plan sponsors to balance budgets and engage in strategic planning. We begin by quantifying the volatility in the required contributions US states were expected to make between 2001 and 2013 and comparing the volatility of pension spending to other relevant tax and spending measures. Next, we describe the various types of pension reforms that states have implemented and examine the fiscal pressures facing those states that have engaged in reform. States with greater fluctuations in their required payments have been more likely to reduce benefits and increase employee contributions; they have also been more likely to institute these reforms sooner.JEL CODES: H75, H72, H83

Public Pensions and Collective Bargaining Rights: Evidence from State and Local Governments

“…Budget and negotiation power are not enough to force a change in public pension generosity and pension reform. Outcomes are shaped by state political and legal conditions and reflect public personnel and finance management priorities (Brown 2014; Chen 2016; Coggburn and Kearney 2010; Riccucci 2015; Schneider 2005; St. Clair and Martinez Guzman 2017; Thom 2015). Legislators and state and local governments, depending on the interests they represent, might have different preferences for policies related to public pension systems.…”

“…Pension generosity was measured through the total normal cost rate, which is the amount of benefit actuarially accrued that an employee earns for the current year of working (Mitchell and Smith 1994; Munnell 2012; St. Clair and Martinez Guzman 2017). This ratio was calculated by estimating the amount needed to be put aside in a given year to cover the total present value of an employee's expected benefits in retirement as a percentage of total payroll (Center for Retirement Research at Boston College 2015; Munnell 2012, 96).…”

City Revenue Structure and Unfunded Pension Liabilities

“…Over the past decade, research on retirement funding has disproportionately focused on complete pension plans (e.g., Chen 2018; Chen and Matkin 2017; Dulebohn 1995; Martell, Kioko, and Moldogaziev 2013; Mohan and Zhang 2014; Munnell 2012; Shnitser 2015; St. Clair 2013; St. Clair and Guzman 2018; Q. Wang and Peng 2014) and only a handful of studies has examined pension funding at the level of individual local plan sponsors (Munnell et al 2013a; Munnell and Aubry 2016a; PEW 2013; Sun 2013).…”

Determinants of second pillar pension reforms: economic crisis and globalization

“…Our study similarly adopts a duration analysis approach to explore the determinants of second pillar pension reforms. Event history analysis offers a richer analytical framework than simple panel data analysis because it takes into account the speed of event occurrence, in addition to the likelihood of event occurrence (see, e.g., Clair and Guzman 2018). In a departure from Brooks (2005, 2007 b ), however, we use the mean values of time-varying independent variables rather than their annual values in the panel 7 .…”

“…Other studies point to the role of macroeconomic factors including economic stagnation (Jensen and Richter, 2004), debt levels (James and Brooks, 2001), globalization pressures (Lesay, 2006;Brooks, 2007a), as well as business cycles (Beetsma et al, 2017). Prior studies have also deliberated the role of economic crisis (Müller, 2003); demographic aging (Góra, 2013); influence by international organizations such as the World Bank and the International Labor Organization (Müller, 2001;Brooks, 2005;Orenstein, 2005); and pension contribution volatility (Clair and Guzman, 2018). 3 Yet the large majority of these studies are narrative and descriptive in nature.…”