Critical Issues in the Transition From the Defined Benefit to the Defined Contribution Pension Model

Abstract

The dramatically increased costs of maintaining many public pension systems after the recent economic downturn have spurred a number of state and local governments to reassess the sustainability of traditional defined benefit (DB) pension plans and to explore reforms. To relieve this fiscal burden, some municipalities have considered implementing defined contribution (DC) plans for some portions of their workforce. This article explores critical issues attendant to implementing this paradigm shift. Utilizing a survey, the authors examine the perceptions of municipal finance and human resource managers regarding this potential transition. Findings indicate that these groups hold virtually identical positions on these issues. Reforms undertaken to bolster sustainability of the DB-centered model may bear unanticipated consequences-both positive and negative-that are largely unexplored given their recentness. Practitioners should prepare for these eventualities.

Path Dependence in Pension Policy: The Case of Florida Local Governments

“…Similarly, their career trajectories may have been bound to a handful of employers; thus, for them the DB model may be an integral part of government employment and an extension of the classic Weberian model of civil service as a lifetime career. Yet, younger American workers rather envision multiple careers over their lifespan, which augurs for greater pension portability (Cong et al ). Conversely, public managers may well recognize this shift in preferences, but fear that adoption of the DC model will foster greater turnover (Lewis and Stoycheva ).…”

From Stand-Alone Pensions to Alternative Retirement Plans: Examining State and Local Governments

“…They take advantage of favorable funding ratios and offload future funding risk onto younger, entering employees by adding self-managed plan choices for them. It is an example of the broader movement to alternative retirement plans to improve funding of DB plans (Cong et al, 2015; Thom, 2013).…”

“…The decline in funded ratios for pension plans and the increasing gap between pension assets and liabilities have raised questions about the delivery of promised DB pension benefits under the current parameters of plan management (Wang & Peng, 2014). Cong et al (2015) suggest that sustainability is a long-term issue for the DB pension plan. Therefore, plan innovations become increasingly attractive for governments.…”