States that close pension plans face increased costs, retirement insecurity

A new series of case studies released from the National Institute on Retirement Security (NIRS) shows that taxpayers’ costs increased when four states closed their pension plans in favor of alternative plan designs. As the states shifted new employees from their defined-benefit pension plans to defined-contribution or cash-balance plans, they did not experience major improvements in the funding of their existing pensions.

Key conclusions from the research, Enduring Challenges: Examining the Experiences of States that Closed Pension Plans, include:

• Switching from a defined benefit pension plan to a defined contribution or cash balance plan did not address existing pension underfunding, despite claims that such changes would improve funding levels or slow growing liabilities of the retirement plans. Instead, costs for the states reviewed (Alaska, Kentucky, Michigan and West Virginia) increased after closing their pension plans.
• Changing benefits for new hires does not solve existing funding shortfalls, as the experience of these states shows. Managing legacy costs is key to responsible funding of pension plans.
• Greater retirement insecurity for employees has been a challenge due to changes in plan design, leading West Virginia to reopen its closed pension plan.
• Other workforce challenges, such as difficulty recruiting and retaining public employees, are emerging as a result of the changes to retirement benefits. In Alaska, the Department of Public Safety lists the ability to offer a pension as a “critical need” for the department.

Download the NIRS case studies here.