Practical Applications of The Trouble with State Government Employee Pension Plans: The Case of Connecticut

Abstract

In <b><i>The Trouble with State Government Employee Pension Plans: The Case of Connecticut</i></b>, from the Winter 2022 issue of <b><i>The Journal of Retirement</i></b>, author <b>Mark J. Warshawsky</b> of the <b>American Enterprise Institute</b> explores threats to the financial viability of state- and municipal-employee pension plans. Unlike the private sector, most public-sector employers still offer defined-benefit (DB) lifetime pensions to employees. However, many of these pensions are seriously underfunded. That threatens the retirement income security of public employees and puts taxpayers at risk of having to pay for bailouts. The author pinpoints several factors contributing to this problem. Most significantly, states and municipalities have contributed too little to their DB plans and have made optimistic assumptions about future investment returns. Using the State of Connecticut’s DB plans as a case study, the author finds they have tried to address these problems by extending amortization periods to pay off liabilities. The author tests these measures and finds that the Connecticut plans are still overly optimistic and at risk of shortfalls. He therefore suggests that the federal government regulate public-employee DB plans and that Connecticut close its DB plans and offer defined-contribution (DC) plans instead.