Public Pension Reform

   < < Go Back
from NCPA,

Redesigning the public pension benefit structure is the key to developing a fiscally sustainable pension model, say Carl. A Hess, the global head of Towers Watson Investment, Thomas J. Healey, a senior fellow at Harvard University’s John F. Kennedy School of Government, and Kevin Nicholson, a consultant at McKinsey & Company.

– The nationwide public pension deficit is estimated at somewhere between $730 billion and $4.4 trillion.

– In Detroit alone, the unfunded pension obligation is $3.5 billion, according to the city’s emergency manager Kevyn Orr.

As calculated by Hess, Healey and Nicholson:

– Increasing the retirement age to 65 reduces pension costs from 22.5 cents for every dollar of salary to 16.8 cents (a savings of 25.3 percent).

– Changing the final average compensation base to the course of a career cuts pension costs from 22.5 cents to 15.1 cents (a savings of 32.8 percent).

– Removing the cost of living adjustment reduces pension costs from 22.5 cents to 17.2 cents (a savings of 23.5 percent).

If all of these policy changes were implemented together, annual pension costs could be reduced by a full 62 percent, down from 22.5 cents to 8.4 cents per dollar of salary.

Several states (Illinois) and municipalities (Atlanta) have implemented reform programs that illustrate that it is possible to tackle the problem of pension plan underfunding:

More From NCPA: