A Misguided 'Solution' to a Nonexistent Problem: The High Cost to Taxpayers of Forcing Florida Public Employees Into Lower-Quality Retirement Plans

Authors: 
Sarabeth Snuggs
Authors: 
Stephen Herzenberg
Publication Date: 
March 26, 2013

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Read our policy brief on the Florida Senate's plan to restructure the state's pension system

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Executive Summary

The Florida House of Representatives on March 22 approved a major restructuring of Florida’s public employee retirement system that would raise costs to taxpayers while forcing teachers, police officers, and other public servants into an inferior retirement plan.  This action flies in the face of the research and experience in more than a dozen states that have considered or implemented similar retirement plan changes.

If it became law, the House bill would eliminate for new public employees the option of a guaranteed pension that provides a defined retirement benefit based on the employee’s salary and years of service. The proposal would require new employees to join the state’s 401(k)-type plan, which defines only the amount contributed by employer and employee each year. 

The House bill would increase the taxpayer cost of Florida’s public-employee pensions by lowering the investment returns on the assets of the Florida Retirement System (FRS). Even since 2001, a difficult period for financial markets, investment returns have covered two-thirds of the costs of public-sector pensions in Florida, lowering the pension contributions required by public employers and hence by taxpayers. Under the House proposal, pension fund assets would have to be invested in a less risky and more liquid portfolio as remaining plan participants age and retire as a group. As a result, investment returns would fall—and the cost to taxpayers rise. The House proposal could also harm current members of Florida’s defined benefit plan because future financial difficulties for the pension fund could lead to benefit cuts and employee contribution increases beyond those already enacted in 2011.

This policy brief reviews in more detail:

  • The analytical reasons that pension plan investment strategies change, and investment returns fall, once a defined-benefit plan is closed to new employees. 
  • Studies in 12 states that highlight the decline in investment returns once defined-benefit plans stop taking in new hires. 
  • The disappointing real-world outcomes in three states that have closed defined-benefit plans to new hires. 

All three types of evidence—logic, studies in other states, and actual experience—point to the same conclusion: closing Florida’s defined-benefit pension to new employees will increase the costs of public-sector pensions for taxpayers.

Enacting the House proposal would not only be costly. It is also unnecessary. Florida has one of the most well-funded defined-benefit retirement systems in the country, and the fund’s financial condition will improve as the FRS gradually reflect recent financial market gains and the cost savings in Florida’s 2011 pension changes.

Read a Press Release

Download the Full Policy Brief