Contribution volatility and public pension reform

Travis St. Clair, Juan Pablo Martinez Guzman

Research output: Contribution to journalArticle

Abstract

In the wake of the economic downturn of 2008–2009, researchers and policymakers have focused considerable attention on the extent of unfunded liabilities in US public sector pension plans and the implications for the long term fiscal sustainability of state and local governments. In response to the growth in liabilities, many states have introduced legislation that cuts back on defined benefit (DB) plan commitments, in some cases even shifting the pension system from a DB to a defined contribution or hybrid plan. This paper explores the factors that have led states to engage in pension reform, focusing particular attention on one factor that has only recently gained attention in the research literature: contribution volatility. While unfunded liabilities have significant long-term solvency implications, in the short term fluctuations in the amount of required contributions pose substantial difficulties for the ability of plan sponsors to balance budgets and engage in strategic planning. We begin by quantifying the volatility in the required contributions US states were expected to make between 2001 and 2013 and comparing the volatility of pension spending to other relevant tax and spending measures. Next, we describe the various types of pension reforms that states have implemented and examine the fiscal pressures facing those states that have engaged in reform. States with greater fluctuations in their required payments have been more likely to reduce benefits and increase employee contributions; they have also been more likely to institute these reforms sooner.

Original languageEnglish (US)
Pages (from-to)1-21
Number of pages21
JournalJournal of Pension Economics and Finance
DOIs
StateAccepted/In press - Apr 6 2017

Fingerprint

Liability
Public pensions
Pension reform
Factors
Fluctuations
Defined benefit
Legislation
Fiscal
Budget balance
Strategic planning
Defined contribution
Politicians
State and local government
Public sector
Solvency
Sponsor
Pensions
Fiscal sustainability
Employees
Pension system

Keywords

  • H72
  • H75
  • H83

ASJC Scopus subject areas

  • Finance
  • Economics and Econometrics
  • Organizational Behavior and Human Resource Management

Cite this

Contribution volatility and public pension reform. / St. Clair, Travis; Martinez Guzman, Juan Pablo.

In: Journal of Pension Economics and Finance, 06.04.2017, p. 1-21.

Research output: Contribution to journalArticle

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