A Budget Fix That Isn't

Thinking ahead? Thinking of saving money by converting the state or local defined benefit pension plan into a defined contribution plan -- one that wouldn'...
October 31, 2008

Thinking ahead? Thinking of saving money by converting the state or local defined benefit pension plan into a defined contribution plan -- one that wouldn't be so dependent on pension investment earnings and beholden to actuarially determined liabilities?

Not so fast, says Beth Almedia,executive director of the National Institute ono Retirement Security. Almedia has authored a new paper that says, in effect, you'd lose money by switching.

Here's her key point:

"States have found that abandoning a DB pension for a DC plan can actually increase costs, contrary to expectations. Mostly, this is because accounting regulations require pension obligations to be paid off sooner when a plan is frozen. It has a similar effect of refinancing from a 30-year mortgage to a 15-year mortgage, which drives up your payments. Yes, you pay off the mortgage sooner. But just as most households don't see this as a solution to their problems right now, state and local governments facing budget pressures won't find it helpful to be accelerating pension payments unnecessarily."

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