While a defined-contribution (DC) approach is not perfect, experience with reformed 401(k) plans and the Thrift
Savings Plan for federal government employees shows that a DC pension plan can be managed cost-effectively for employees and taxpayers alike.
The Public Employees’ Retirement System of Nevada provides retirement, survivors and disability benefits for Nevada state and local government employees. It is currently one of the better-funded public-sector pensions, due to sound management and consistent government contributions.
However, the true funding health of Nevada PERS is far poorer than most realize, due to accounting standards that are far more lax than those required for private-sector plans. Using fair-market valuation, which is endorsed by the vast majority of professional economists, is used by financial markets to value liabilities and which is required of private-sector plans, Nevada PERS’ funding ratio falls from 70 percent to around 34 percent and its unfunded liabilities would rise from about $10 billion to almost $41 billion.
Annual contributions to cover accruing pension costs and amortization of unfunded liabilities would rise from $1.6 billion to an estimated $5.8 billion.
As alarming as these figures may be, they are the figures that economists and financial markets believe are the most
revealing of the true financial health of the Nevada pension program.
Shifting PERS to a defined-contribution, 401(k)-type structure would not make these unfunded liabilities go away. However, it would ensure that benefit obligations are fully funded going forward, ensuring that lawmakers, taxpayers and public employees are clear regarding the pensions promises the government has made and its ability to fulfill them.
Andrew G. Biggs is a resident scholar at AEI