State and Local Public Pension Finances and Reform Proposals:Are Lump-Sum Payout Offerings a Solution?

Abstract

Some states and municipalities are in difficult financial straits. Many more have severely underfunded defined benefit pension plans for their past and current employees. At the intersection of these two sets, it is likely that the pension plans are not sustainable and cuts are inevitable, affecting even the benefits of current retirees. But in many of these states and municipalities, the courts have not allowed changes to the pension plan. Therefore, we propose that all government pension plan participants be given accurate information about the funded status of their pensions. Furthermore, we propose that, at the discretion of the plan sponsor, retirees and older workers be given the voluntary option to take their pensions as a lump sum, discounted according to the funded status of the plan.