Why Are There Any Public Defined Contribution Plans?
Wiles, Gregory. “Why Are There Any Public Defined Contribution Plans?”, Boston College, 2006. http://hdl.handle.net/2345/413.
Retirement plans for state employees have over $2 trillion in assets, a significant portion of the U.S. retirement market. In the last 10 years, seven states have transitioned their employee retirement plans from traditional annuity-providing defined benefit pensions to individual account-style defined contribution plans. While private-sector employers save money in transitioning to a defined contribution plan, states actually lose money when switching. Why state governments choose to sponsor retirement plans that cost both the state and its employees money is the central question of this study. Several financial and demographic variables are considered; the only variable that cannot be ruled out is political ideology. The probit panel regression finds that states with Republican-controlled governments are far more likely to switch to a defined contribution plan than states with mixed or Democrat-controlled governments. This conclusion illuminates the central importance of unions in the political process of public plan decision-making and reveals the importance of potential economics losses that result from sponsoring defined contribution plans.