Monday, September 30, 2013

ReseARCh BRief - Public Affairs Research Council of Louisiana

ReseARCh BRief - Public Affairs Research Council of LouisianaGovernor’s Cash-Balance Plan Offers Advantages But Questions Remain About Its Ultimate Impact The governor is proposing a set of changes to Louisi- For taxpayers, the governor’s proposed cash-balance ana’s pension programs for the purpose of reducing the retirement plan aimed at new state employees

poten- state’s retirement costs and the burden of pension liabilitially brings several distinct advantages over Louisiana’s ties. Among these initiatives is a proposal to offer a cash- current defined benefit system. The main benefit could balance plan for new hires that over time would replace come in the form of long-term cost savings from guaran- the existing defined benefit plan as the primary retire- teeing only the interest gained on employee retirement program for most state accounts. The state would not be promising a greater The proposed workers. This report examines benefit than the gains achieved in the financial markets, cash-balance plan the state’s unfunded accrued thereby reducing the risk of accumulating unfunded would replace liability and the potential im- liabilities. However, under a cash-balance plan, em- pacts of the cash-balance plan employees are protected in that their retirement accounts the existing defined on the state and its employees. cannot lose value. This protection runs a financial risk for benefit plan as the the retirement systems. Actuarial estimates vary as to Most Louisiana government primary retirement whether the plan would offer cost savings to the state. workers and teachers are en- program for new rolled in a defined benefit plan, The cash-balance plan would not use the current system state workers. in which employees receive a tem’s “final pay” formula, which leads to salary spiking guaranteed monthly income and other bad effects. For some employees who do not for the rest of their lives after they retire. The income spend their full careers in government service, the cash- is based on a formula that includes the number of an balance plan offers the advantages of portability and employee’s years of service and the average salary of under some scenarios provides the employee’s highest-earning years, which are usually a better financial package. Actuarial estimates the last few years before retirement. The formula -- not Decision makers should design vary as to whether the the performance of the retirement system investment the program to provide em- plan would offer cost portfolio -- determines the guaranteed benefits. ployees a fair level of retirement savings to the state. Traditional defined benefit plans can be attractive to benefits based on realistic ex- long-term employees and are considered by many to pectations, especially considering the fact that Louisi- be an effective recruitment tool for government service. ana’s state government workers are not participating in...

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