The future of public employee pensions in the United States

Traditional defined benefit (DB) pensions, where benefits are based on final salary, have given way to defined contribution plans where benefits are based on contributions and investment returns. But one area where defined benefit plans remain dominant is the public sector. Nearly all employees at all levels of the US government are offered a traditional pension, and the majority of employees receive most or all of their retirement benefits from a DB plan. However, the cost and risk of DB pensions has become a pressing issue for US cities and states, where pension funding has suffered despite rising contributions and increased risk-taking through plan investments. Rising costs have placed pressures on government budgets, squeezing out resources available for other budget priorities such as education and healthcare. This study describes the structures, investment practices and funding health of US state and local pensions, while examining some of the policy issues pensions pose to lawmakers and certain reforms that have been considered.