By Jon Whiten
Moving new employees out of defined benefit pension plans and into 401(k)-type retirement accounts would not reduce New Jersey’s crushing pension debt and could cost taxpayers $42 billion for the transition, according to a study released today by New Jersey Policy Perspective and the Pennsylvania-based Keystone Research Center.
“Most states that have considered switching employees to 401(k)-type accounts have rejected doing so because it risks putting a severe burden on taxpayers,” said Dr. Stephen Herzenberg, Keystone Research Center economist and author of the report. “The three states that have actually gone forward have seen pension debt mushroom. It’s a policy prescription that New Jersey taxpayers simply can’t afford.”
While no actuarial studies have yet been conducted of the cost of a switch to 401(k)-type accounts in New Jersey, Pennsylvania conducted studies of pension plans with the same unfunded liabilities and pension assets as New Jersey’s just last year. These studies found that closing existing pension plans to new employees would increase pension debt by $42 billion. Given the nearly identical size and funded status of New Jersey’s plans, $42 billon is a close estimate of the cost of a switch to 401(k)-type accounts in New Jersey. This cost is driven by the fact that investment returns of defined benefit pension plans gradually fall once they close to new employees and their only remaining members are retired or approaching retirement.
Studies of proposals to switch to of 401(k)-style plans in a dozen other states also found that this change would increase pension debt by reducing investment returns.
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