NCPA - National Center for Policy Analysis

Orange County's Public Pension Compromise

January 19, 2011

As state and local governments grapple with underfunded public pensions, and debates swirl about the advisability of putting new public hires into 401(k)-type plans, some innovative employers and unions are finding that old-fashioned compromise might offer the best path forward, says Roger W. Ferguson Jr., a former vice chairman of the U.S. Federal Reserve.

Consider Orange County, Calif.  Last year, the county adopted a groundbreaking approach for providing pensions for newly hired workers.  The plan is a hybrid model:  It combines contributions by the county and its employees with both a traditional defined-benefit pension and individual accounts, which the worker can take with him from job to job.  Here is how it works, says Ferguson.

  • The plan maintains a strong traditional pension, but it reduces the requisite contribution for both the county and its employees.
  • It also redirects a portion of that money into the defined-contribution part of the plan where the money can grow over time.
  • Unlike a typical 401(k), the defined contribution part of the hybrid plan emphasizes retirement income as the primary goal.
  • It incorporates affordable deferred annuity options during employees' working years that can deliver income in retirement that compares favorably with what workers can expect from the traditional pension plan alone.
  • The hybrid plan also increases workers' take-home pay because workers' contributions are lower than they are in the old defined-benefit plan.

This new program helps workers think about how much monthly income they will need in retirement -- as opposed to how big a nest egg they're building, says Ferguson.

Source: Roger W. Ferguson Jr., "Orange County's Public Pension Compromise," Wall Street Journal, January 15, 2011.

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