The Mercatus Center at George Mason University recently released a new working paper entitled: The Crisis in Public Sector Pension Plans: A Blueprint for Reform in New Jersey, aimed at helping state legislators try to address the pension underfunding crisis, which tallies a whopping $173 Billion in New Jersey. Some of the lessons that New Jersey could learn are also applicable in the Free State, since Maryland’s pension system lost a reported $10 billion in the last half of 2008, and Maryland’s unfunded health and pension liabilities exceeds $32 billion. So while, in absolute terms, Maryland isn’t in the position that New Jersey is, the core problem is as serious: Benefits the state promised to its employees aren't funded at acceptable levels, and with continuing economic uncertainty, the chance of the problem solving itself (through generous stock market returns) is slim to none.
So what should states do to help solve this problem? Generally, states need to move away from defined benefit plans, which pay a set amount (with a periodic cost of living adjustment) to defined contribution plans, where the state contributes a set amount every year to an employee’s retirement account. In a defined benefit plan, the state must absorb market volatility, no matter how bad it gets. In a defined contribution plan, employees must plan for market uncertainty, in the same way as anyone that relies on a 401(k) account must.
More specifically, the authors of the study recommend three things for New Jersey: 1. Extend define contribution plans to all state employees; 2. Reduce, or freeze, cost of living adjustments to reduce state liability; and 3. Transition non-vested workers to defined contribution plans. These three steps should be examined seriously by any state with outsized pension liabilities in order to get back on to the road to pension solvency.
This certainly includes Maryland.
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