For an article in the Daily Northwestern, I was asked to comment on some pension proposals by State Rep. Daniel Biss of Illinois, one of which would involve the creation of a cash balance pension plan for future state workers. A cash balance plan is a type of hybrid retirement plan in which the sponsor (e.g. the state) promises to grow employer and employee contributions by a certain specified rate, and then pay an annuity based on that balance at retirement. Here were my comments, which I made via email:
A cash balance system that promises asset growth at a low rate, such as that of long-term Treasury bonds, and converts the balance to an annuity at prevailing rates in insurance markets, could be managed so that it generates no unfunded liabilities for the state. However, the very common temptation is to promise a higher rate of accrual on the plans, and just as with traditional DB plans in the public sector, to hope that those higher returns are achieved by setting aside risky assets.
The extent to which the state can avoid that temptation (to promise safe benefits and attempt to deliver them with risky assets) will determine how successful the plan would be in avoiding new unfunded liabilities.
The author of the article paraphrased the above passage as my indicating that a cash balance plan could eliminate the existing unfunded liability, which of course neither I nor Daniel Biss believe (see his own direct quote in the article).