Issues Facing State and Local Government Pensions

At the turn of the century, many U.S. public pension funds faced a “perfect storm,” brought about by the confluence of unfavorable demographics, low interest rates that increased the present value of liabilities, declining investment returns from the stock market, and swelling ranks of pension benefit claimants. As state and local governments try to address these challenges and plan for the future, some analysts have begun to question whether traditional notions of defined benefit pension plans (where the retiree is guaranteed a monthly income for life) can be sustained. Many private sector firms have abandoned these traditional pensions in favor of defined contribution plans, whereby individuals are responsible for ensuring that their retirement plans are adequate to meet their retirement needs.