Deficits at state-pension funds are the real monsters threatening municipal stability. Estimates of shortfalls at these funds range from $1 trillion from the Pew Center on the States to $3 trillion from Orin Kramer, the former chairman of New Jersey’s State Investment Council.
There are numerous strategies that individual pension-plan sponsors are using to stabilize their funds, including:
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Reducing benefits
Increasing employee contributions
Making additional public contributions to “top up” the fund
Trying to increase returns for the fundby increasing investment risk
Changing to a defined contribution plans
The excellent graphic above, provided by the Pew Center on the States, shows how many states are adopting the first and second strategies listed above. The upside of these methods is they stabilize fund assets immediately.
As most pre-existing pension plans are defined benefit plans (think standard public pension), the fifth strategy of changing to a defined contribution plan (think 401K) has been the focus of much discussion. Unfortunately, this change shifts almost all of the risk for providing benefits to the retiree.
An excellent report from the Center For Retirement Research defines the risks:
The defining characteristic of defined contribution plans is that they shift all the responsibilities and all the risk from the employer to the employee.
