NIRS on Costly Pension Misktakes in Alaska, Michigan and West Viginia

NIRS Executive Director Diane Oakley testified before Pennsylvania lawmakers on recent research that examines the experience of states that shifted public employees from a defined benefit (DB) pension plan to defined contribution (DC) 401(k)-style individual accounts.

She said NIRS research indicates that the best way for a state to address pension underfunding is to implement a responsible funding policy with full annual required contributions. The research reveals that West Virginia, Alaska and Michigan shifted from DB pension plans to DC individual accounts only to experience higher costs. Moreover, current financial data indicate that the DB to DC switch in fact worsened pension funding issues.

Oakley also noted that public pensions help states with workforce management in terms of attracting, retaining and transitioning employees to retirement. She highlighted that a retirement plan is an “extremely” or “very important” job feature to nearly nine out of 10 public employees, and salary is less important. NIRS research finds that salary is an “extremely” or “very important” job feature to less than six out of 10 public employees. Importantly, this preference is in contrast to private sector workers. Salary is far more important than retirement benefits for private sector workers. Accordingly, changes to public sector retirement benefits could result in demands for higher salary so that public employees can achieve a secure future.

Download the testimony here.

Download the Alaska, Michigan and West Virginia Case Studies here.