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News from EPI Louisiana’s new pension system will increase risk for workers without saving taxpayers money

For Immediate Release: Wednesday, December 13, 2012
Contact: Phoebe Silag or Donte Donald, 202-775-8810

Louisiana’s new pension system will increase risk for workers without saving taxpayers money

Louisiana’s new cash balance pension system will increase risk for state and local government workers but is not projected to save taxpayers money, a new EPI report finds. In New Louisiana retirement plan is bad for workers and taxpayers: Cash balance plan increases retirement insecurity without offering any savings, economist Monique Morrissey examines the cash balance plan in which many newly hired public-sector employees in Louisiana will participate beginning in 2013. Public-sector workers in Louisiana currently participate in a defined benefit pension plan; they are not covered by Social Security.

In the current system, participants receive fixed payments in retirement, regardless of stock market performance. Workers shoulder two-thirds of the cost of their pensions and employers contribute one-third, or four percent of pay, less than they would contribute under Social Security. The average annual benefit for regular members is $19,000. Under the cash balance system, participants will earn a variable rate of return, similar to 401(k) accounts, though cash balance accounts will be shielded against outright losses.

Louisiana’s pension system is currently underfunded due to the failure by public officials to keep up with actuarially required employer contributions. The switch to a new system does not address this problem, and state and local governments will have to make the same payments to close the shortfall under the new plan as they do under the old plan.

The policy memo cites a number of reasons why Louisiana’s new cash balance plan is flawed:

  • It is not projected to save taxpayers money. In fact, the new system could cost taxpayers more than the old system by affecting employee recruitment and retention; by prompting a shift toward more conservative and liquid (and thus lower-yield) investments; and by introducing an element of gamesmanship to retirement decisions.
  • It burdens state and local government workers with many of the same risks as private-sector workers with 401(k)s, but without Social Security as a fallback, leaving many public-sector workers in Louisiana at risk of poverty in old age.
  • It increases financial risks for workers who become disabled before retirement and family members of workers who die before retirement.

“This is a lose-lose plan, and should not serve as a model for other states,” Morrissey said.