A Role for Defined Contribution Plans in the Public Sector
In the wake of the financial crisis, policymakers have increasingly discussed the notion of the public sector switching from defined benefit (DB) plans to defined contribution (DC) plans. Three states — Georgia, Michigan, and Utah — have taken action. Interestingly, these new plans are “hybrids” that combine elements of both DB and DC plans.
Such an approach spreads the risks associated with the provision of retirement income between the employer and the employee. This brief provides an update on DC initiatives in the public sector and then discusses whether the hybrids that have been introduced are the best way to combine the two plan types. Key findings include:
- In recent years, a few states have shifted from defined benefit to defined contribution pension plans.
- Many of the new plans are “hybrids” with a slimmed down DB plan and a minimal DC plan, which shifts substantial risk to employees.
- An alternative hybrid design could offer a full DB plan up to an income cap and “stack” a DC plan on top for those with higher incomes.
- The “stacked” approach would give those with modest incomes the full protection of a DB plan while limiting taxpayers’ commitment to those with higher incomes.