Public sector pensions in Nebraska

Article Highlights

  • Nebraska's cash-balance plan presents what could be a model for public sector pension reform

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  • Cash-balance pension plans allow employers to attract young, mobile employees

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  • Cash-balance plans put Nebraska is good position relative to other stats on pensions

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Yesterday, the Platte Institute released its policy study on public sector pensions, examining the benefits and shortcomings of Nebraska's unique cash-balance plan.

The cash-balance plan (CB) presents what could be a model for public sector pension reform, as CBs offer some of the better aspects of both traditional defined benefit pensions (DB)-the most common public sector pension-and defined contribution plans (DC)-401(k)-type plans that dominate in the private sector and where participants bear the investment risk. CBs offer far greater portability than DB pensions, allowing public employers to attract young mobile employees and removing disincentives for employees to leave.

"Nebraska's CB plans are innovative and could be a model for other states to follow as they try and bring their budgets and pensions under control."--Andrew Biggs

However, CB and DB plans both operate under a set of accounting rules that economists almost universally believe understates pension liabilities and hides investment risks borne by taxpayers. In the case of Nebraska's cash balance plans, this arises through the government's guarantee of a 5 percent annual return on account balances regardless of the returns available in the market. Such a guarantee is easily priced and shows the true costs of the Nebraska cash balance plan to be far greater than currently understood.

While the cash balance plan claims to be 95 percent funded, when the market value of the rate of return guarantee is included, the plan is only around 50 percent funded. Claims by pension managers that market values do not apply to government plans are not supported by the vast majority of economists; to dismiss market evaluations imperils taxpayer money.

CB plans also allow greater financial transparency than DB plans by making their rate of return guarantees explicit and easier to understand. Yet they are still not the most transparent system; DC plans are by far the most transparent and the least susceptible to gaming by employees and policymakers alike. Furthermore, when DC plans are set up as thrift savings plans, they become even more beneficial for both recipients and taxpayers, as they allow retiring workers to easily and inexpensively convert a lump sum into a lifetime income.

While Nebraska is in better shape than most states, there is still work to be done. Nebraska's CB plans are innovative and could be a model for other states to follow as they try and bring their budgets and pensions under control. Yet there are other, more transparent and taxpayer-friendly ways Nebraska could construct the pension system. But for the time being, cash balance plans are putting Nebraska in a very good position relative to other states.

The full policy study may be viewed here.

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About the Author

 

Andrew G.
Biggs
  • Andrew G. Biggs is a resident scholar at the American Enterprise Institute (AEI), where he studies Social Security reform, state and local government pensions, and public sector pay and benefits.

    Before joining AEI, Biggs was the principal deputy commissioner of the Social Security Administration (SSA), where he oversaw SSA’s policy research efforts. In 2005, as an associate director of the White House National Economic Council, he worked on Social Security reform. In 2001, he joined the staff of the President's Commission to Strengthen Social Security. Biggs has been interviewed on radio and television as an expert on retirement issues and on public vs. private sector compensation. He has published widely in academic publications as well as in daily newspapers such as The New York Times, The Wall Street Journal, and The Washington Post. He has also testified before Congress on numerous occasions. In 2013, the Society of Actuaries appointed Biggs co-vice chair of a blue ribbon panel tasked with analyzing the causes of underfunding in public pension plans and how governments can securely fund plans in the future.

    Biggs holds a bachelor’s degree from Queen's University Belfast in Northern Ireland, master’s degrees from Cambridge University and the University of London, and a Ph.D. from the London School of Economics.

  • Phone: 202-862-5841
    Email: andrew.biggs@aei.org
  • Assistant Info

    Name: Kelly Funderburk
    Phone: 202-862-5920
    Email: kelly.funderburk@aei.org

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