Look Before You Leap: The Unintended Consequences of Pension Freezes, a new issue brief from the National Institute on Retirement Security (NIRS), makes the case for why pension freezes aren’t always a good idea for state and local governments. Here are some of the brief’s key findings:
Freezing a traditional defined benefit pension (DB) and moving to a 401(k)-type defined contribution plan (DC) can increase costs to the employer/ taxpayer at exactly the wrong time, because:
(1) Maintaining two plans is more costly than operating just one;
(2) Foregoing and undermining the economic efficiencies of DB pensions drives up retirement plan costs; and
(3) Accounting rules can require pension costs to accelerate in the wake of a freeze.
Freezing a DB pension and moving to a DC plan can increase retirement insecurity, potentially damaging recruitment and retention efforts.
In the words of the authors: “Time and again, states that have carefully studied the issue have concluded that, even in tough economic times, continuing to provide retirement benefits via cost-effective DB plans meets the joint interests of fiscal responsibility for employers/taxpayers and retirement security for employees.”
The issue brief was written by Ilana Boivie and Beth Almeida of NIRS.