Pension plans for state and local government employees have become increasingly underfunded in recent years, with total shortfalls nationwide ranging from approximately $1 trillion to more than $4 trillion, depending on how plan liabilities are measured. Annual required contributions have more than doubled over the past decade, and many plan sponsors were unable to make required contributions during the recession that began with the financial crisis of 2007 and the slow recovery that followed.
Closing defined benefit plans reduces or prevents the accumulation of additional unfunded liabilities. There are many reasons elected officials may favor or oppose shifting public employees out of traditional defined benefit pensions into cash balance or defined contribution plans. But concerns over so-called “transition costs” are largely mistaken and should not stand in the way of public employee pension reforms.
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