The transitional impact of state pension reform

Abstract

We use an overlapping generations framework to evaluate the transitional impact of state pension reform on public and private workers, extending our analysis to all fifty U.S. states. We consider reducing cost-of-living-adjustments (COLAs) for retirees and reducing benefit accruals for current workers. The magnitude of reform in each state is calibrated to achieve a common policy goal: the elimination of unfunded pension liabilities within twenty years.

Although each reform effectively decreases long run taxes by reducing pension liabilities, variation in fiscal and demographic features creates significant differences in state outcomes. Both reforms yield an asymmetry in welfare outcomes, providing gains to private workers through reduced taxes while causing losses to public workers due to reduced pension income. Wage compensation for affected public workers proves to be a valuable policy instrument for achieving better balance. In the aggregate, state level welfare gains are possible for both reforms.