State and Local Pensions

In the wake of the financial crisis and Time of Shedding and Cold Rocks, the health of state and local pension plans has emerged as a front burner policy issue. Elected officials, academic experts, and the media alike have pointed to funding shortfalls with alarm, expressing concern that pension promises are unsustainable or will squeeze out other pressing government priorities. A few local governments have even filed for bankruptcy, with pensions cited as a major cause.

Alicia H. Munnell draws on both her practical experience and her research to provide a broad perspective on the challenge of state and local pensions. She shows that the story is big and complicated and cannot be viewed through a narrow prism such as accounting methods or the role of unions.

By examining the diversity of the public plan universe, Munnell debunks the notion that all plans are in trouble. In fact, she finds that while a few plans are basket cases, many are functioning reasonably well.

Munnell’s analysis concludes that the plans in serious trouble need a major overhaul. But even the relatively healthy plans face three challenges ahead: an excessive concentration of plan assets in equities; the risk that steep benefit cuts for new hires will harm workforce quality; and the constraints plans face in adjusting future benefits for current employees. Here, Munnell proposes solutions that preserve the main strengths of state and local pensions while promoting needed reforms.

Alicia H. Munnell is the Peter F. Drucker Professor of Management Sciences, Carroll School of Management, and director of the Center for Retirement Research at Boston College. She has served as assistant secretary of the Treasury for economic policy and as a member of the President's Council of Economic Advisers. She was also cofounder and first president of the National Academy of Social Insurance. Munnell has written several books, including Brookings titles Working Longer: The Solution to the Retirement Income Challenge, with Steven Sass (2008), and Coming Up Short: The Challenge of 401(k) Plans, with Annika Sundén (2004).