Researcher: High Transition Costs For States Switching From DB to DC Plans Are a “Myth”

flying moneyAnthony Randazzo, director of economic research for the Reason Foundation, recently sat down with CapCon to talk about the concept of a state switching from a defined-benefit system to a defined-contribution system.

Disclosure: the Reason Foundation is a libertarian-leaning research organization.

Randazzo has published research in the past claiming that the “transition costs” of switching from a DB to a DC plan are largely a myth – and he expanded on that view in the interview.

From Michigan Capitol Confidential:

Michigan Capitol Confidential: You argue that these “transition costs” are a myth. What’s the basis for that myth?

Randazzo: The myth is based on two mistaken assumptions that certain steps need to be taken when switching from a defined-benefit system to a defined-contribution system. They are:

(1) That government must start making bigger debt payments to the defined-benefit system after it is closed.

(2) That a defined-benefit system needs new members in order to keep it solvent.

Neither of these assumptions are true. Regarding the first mistaken assumption; it might be recommended that a government increase the size of its debt payments after the system has been closed in order to pay off the debt sooner, but there is no legal requirement that it do so.

Regarding the second mistaken assumption, defined-benefit systems are supposed to be fully funded on a yearly basis by employer and employee contributions plus investment earnings. These systems are not based on new workers subsidizing older workers.

Michigan Capitol Confidential: So we have this disagreement between independent pension experts and individuals with an interest in the current systems. What’s at the core of this disagreement?

Randazzo: I think it is a disagreement between philosophies. It’s true that a defined-benefit system could be changed to a defined-contribution system that would be more expensive. But to prevent this, all you would have to do is put in a defined-contribution rate that ensures lower costs. Therefore, if the defined-contribution system – that’s put in place to try to solve a growing debt problem being created by a defined-benefit system – ends up costing too much, to me, that’s not a transition cost, it’s just the result of a bad policy decision.


Michigan Capitol Confidential: And you would argue that switching to a defined-contribution pension system would do away with most of the guesswork.

Randazzo: A defined-contribution system is 100 percent more transparent than a defined-benefit system because it requires zero actuarial assumptions about the future, and zero backroom negotiations with pension boards and union members. The costs of a defined-contribution system are clear every year: it is simply whatever the government body has chosen to be the contribution rate to each employee’s retirement account. The cost is known each year, and taxpayers don’t have to worry about whether investment returns will equal assumptions, or whether people will wind up living longer than expected and costing the system more money than it has projected pensions to cost.

Read the full interview here.


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Panel Recommends Atlantic City Delay Payments to Pension System For Next Three Years

Atlantic City

A task force has released its recommendations for staving off the financial collapse of Atlantic City, New Jersey.

Buried in the report is one recommendation that might sound familiar to residents of New Jersey: that the city should defer its payments into the pension system for the next three years.


State officials and people outside government would take on a greater administrative role in Atlantic City under a plan for the economically troubled resort made public Thursday.

The proposal comes as the city struggles to right its budget and cover debt payments in the wake of four casino closures this year, and as a fifth casino is threatening to shut down.

To help offset financial losses brought on by the casino closings, Atlantic City would be permitted to defer payments into the public employee pension system and could qualify for more state education aid.


The details of the report were discussed Wednesday during a meeting Christie organized with local officials, casino executives and union leaders in Atlantic City. A bipartisan group of lawmakers also attended the meeting and has pledged to work cooperatively with the governor on legislation that may be required to help turn the city around.

John Bury gives his take on that part of the plan over at Bury Pensions:

New Jersey politicians and their enablers had a discussion today where they reviewed a secret report that kicked off with the suggestion:

To help ease the burden on city taxpayers, the recommendations include a three-year window for deferring the city’s employer contributions into the public employee pension system.

And that passes for a solution! How has this strategy worked out for the state which has been shortchanging the pension plans for a generation and is now in day 105 of awaiting more solutions from a study panel report that should have been released 45 days ago.

But the chilling paragraph of the story is:

The recommendations released Thursday were prepared by [Christie adviser Jon] Hanson, who also produced a report for Christie in 2010 that the governor used at the time to guide Atlantic City revitalization efforts.

The same adviser! Wasn’t there somebody in 2010 who looked at Hanson’s guide to AC revitalization then and saw it as a blueprint for closing half the casinos and mass layoffs?

More details of the plan can be read here.

Photo by Richard Feliciano via Flickr CC License