Texas’ local public pension plans are overpromised and underfunded, as is clearly shown by a new mapping tool from the Reason Foundation.
Last week, Reason’s Marc Joffe “built a map of Texas’ local pension systems using data provided by the Texas Pension Review Board” that shows the prevalence of these systems. The data that accompanies this map reveals that many plans are “seriously underfunded.”
Source: Reason Foundation, Mapping Texas Pension Review Board Data
What’s driving the problem here is that most, if not all, of Texas’ locally managed public pension plans operate under the defined benefit (DB) model where the employer guarantees employees a certain annuity payment in retirement generally based on the number of years worked and salary, irrespective of the system’s financial footing.
This system is flawed because it’s apt to be swayed by political considerations and oftentimes rests on a foundation of faulty math. See here for example.
The solution is simple: Transition new employees to a defined contribution (DC) system. This system gives employees more say over how to invest and plan for their retirement and also offers portability between jobs that DB plans do not. Under this plan, employees can put money into a mutual fund, which they control, and employers match to a pre-determined amount.
A transition to public DC plans, as commonly seen in the private sector, would safeguard against Texans fitting the bill of inefficient pension plans through higher taxes, accepting reduced retirement benefits, or both.