Pension Reform : Conceptual Foundations and Practical Challenges

Underfunded pension are the largest liability for state and local governments across the United States. As a result of increasing recognition of the associated risks, recent statutory funding mandates led to a sharp increases in required contributions, threatening city services and employee bases. As funding pressure mounts, pension reforms offer a viable tool for prudent economic policy. We propose five general principles that guide pension reform considerations and discuss how these principle stand in contrast to current policy and actuarial practices. Current actuarial valuation practices of pension liabilities often dissuade cities from adopting pension reforms and can lead to sub-optimal policy outcomes. We illustrate the application of the general principles in the context of several local governments in the U.S., which have recently executed or are actively deliberating a pension reform