Defined Contribution Plans in the Public Sector: An Update
The financial crisis and its aftermath generated two types of responses from sponsors of state and local government pensions: (1) to cut back on existing defined benefit plan commitments by raising employee contributions, reducing benefits for new employees, and, in some cases, suspending the cost-of-living adjustments for existing retirees; and (2) to initiate proposals to shift some or all of the pension system from a defined benefit to a defined contribution plan.
This issue brief describes these changes, identifies the factors that led to the changes occurring in the states that they did, and presents data on participation to put this activity into perspective. The data show that, while the introduction of defined contribution plans by some states has received considerable attention, activity to date has been modest. Key findings include:
- Post-2008 changes have been to establish either hybrid plans or cash balance plans, rather than stand-alone defined contribution plans.
- The changes appear driven by a desire to avoid future unfunded liabilities, to reduce investment and mortality risk, and to help short-tenure workers.
- Such changes transfer risk to participants, but if the new plans enhance the likelihood of responsible funding, they could also offer some increased security.
- Defined benefit plans still dominate; only about 11 percent of public sector workers have a primary defined contribution plan.