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Robert M. Costrell

Robert M. Costrell.

It has long been argued that cash balance (CB) pension plans offer a more equitable distribution of benefits than traditional final-average-salary (FAS) plans for teachers, particularly between short-termers and career teachers.   However, it has also been understood that the impetus for reform would come from fiscal distress, rather than a concern for equity.  In this paper I examine how the nation’s first CB plan for teachers, in Kansas, adopted under such conditions, has played out for system costs, and the level and distribution of individual benefits, compared to the FAS plan it replaced.  My key findings are:  (1) employer-funded benefits were modestly reduced, despite the surface appearance of somewhat generous employer matches; (2) more importantly, the cost of the pension guarantee, which is off-the-books under standard actuarial accounting, was reduced quite substantially.  Thus, although much of the distributional benefit originally put forth did materialize, the primary gain for states considering reform may well be the reduction in the cost of risk-bearing.  Indeed, I argue that these results are intrinsically linked:  it is CB’s near-elimination of back-loading that simultaneously cuts the implicit cost of risk. 

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