Effects of Pension Plan Changes on Retirement Security

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Since 2009, fiscal constraints have forced the vast majority of states to make significant changes to their retirement plans, including increasing employee contributions, reducing benefits, or both. Other states have modified their plan designs, choosing to transfer more of the risk associated with providing retirement benefits from the government to its employees.

Little is known about the effects such changes will have on the retirement income of public employees. This report calculates the retirement income that employees hired under these new benefit conditions can expect and compares it with the income they would have earned before their plan was changed. The report also summarizes interviews conducted with state human resource executives and retirement experts from states that have made significant pension plan changes. Key findings include:

  • Pension reforms reduced the amount of retirement income new employees can expect to receive compared with that of existing employees. Reductions ranged from less than 1 percent to 20 percent.
  • New employees can expect to work longer and save more to reach the benefit level of previously hired employees.
  • Hybrid plans adopted in five states produce a wide range of estimated retirement incomes. Holding investment returns constant, the determining factor in the size of the hybrid benefit is employee and employer contributions. For this analysis those states with higher required contributions produce a higher benefit than those whose statutory contribution rates are lower.
  • Changes to retirement plans include an increase in the number of years included in the final average salary calculation (21 states); a reduction in the multiplier (12 states); and a change to both of these variables (nine states).
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