Public Pension Liability: Why Reform is Necessary to Save the Retirement of State Employees

Abstract

The article contributes to the pension funding and policy debate by analyzing and drawing conclusions for reform from financial and actuarial data reported in the most comprehensive study of public pension funds. Despite their failing financial health and lack of federal government oversight, public pensions have been largely ignored by the legal community (but vigorously examined in the finance, economics, and management disciplines). This article aims to spotlight the funding problem of public pensions and generate ideas for legal reform. Part I provides an overview of pension plans. It explains what they are and how they work. Part II details the data in the 2005 study of state retirement systems and its troubling implications. Part III proposes two reforms to the pension paradigm: offering optional or exclusive defined contribution plans and enacting mandatory uniform disclosure laws. The article concludes that the degree of financial distress evidenced in the recent public pension study confirms that reform is necessary to save the retirement of state employees.

Keywords: pension liability, employee benefits, public pensions

JEL Classification: H72, H75, K31