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Introduction
State and local retirement plans around the world are confronted with rising annual expenditures and increases in their unfunded liabilities. In response to these financial challenges, government policymakers have been making fundamental changes in their pension plans. In the USA, traditional defined benefit plans continue to cover most public employees, yet some states have adopted hybrid plans, others have shifted to defined contribution or cash balance plans, and still others are now giving employees' choices over their retirement plan. And the US state and local governments that have retained their traditional plans continue to enact policy changes that reduce plan generosity. Examples of such modifications include reducing the benefit generosity parameter, increasing the number of years used to calculate the final average salary, raising the ages and increasing the years of service needed for early and normal retirement, and boosting employee contributions to help finance pension benefits. For years, economists have examined how retirement plans influence the behavior of workers in the private sector, but only recently has attention been shifted to an examination of how state and local plan reforms affect public employees. 1
This special issue of the Journal of Pension Economics and Finance includes four articles that examine various aspects of state and local retirement plans and how they affect state and local government budgets, employee behavior, and economic well-being in retirement.2Jeffrey Brown and George Pennacchi reexamine the important issue of how the liabilities of public retirement plans should be measured and reported. Selecting an appropriate discount rate is central to understanding the true magnitude of the unfunded liabilities of the pension plans of cities, counties, and states. Robert Clark, Emma Hanson, and Olivia S. Mitchell study the impact of pension reforms in Utah by estimating the choice of pension plans by newly hired public employees. A unique aspect of this study is its focus on how employees responded to a less generous retirement plan.
Historically, cost of living adjustments (COLAs) in monthly retirement benefits have been an important and costly component of public pension plans. Alicia Munnell, Jean-Pierre Aubry, and Mark Cafarelli present evidence on the prevalence of COLAs and how policy makers are reconsidering COLAs. Robert Clark, Emma Hanson, Melinda Morrill and Aditi Pathak describe the...