A new retirement plan design could allow more public employees in the U.S. to accrue retirement benefits regardless of their length of service, according to a report by think tank the Reason Foundation.
The plan, which blends elements of defined contribution and defined benefit pension plans, focuses on providing employees with the target retirement income replacement ratio determined by the employer, said the report.
The plan offers a longevity annuity default option, which employees can opt out of if they meet certain specific criteria. The report noted the mandatory contribution rates for both employer and employees (as defined by the employer), combined with the investment design and distribution controls, are all designed to minimize risks for employees while meeting the employer’s workplace objectives.
The report compared the relative funding requirements of the plan for three separate longevity scenarios: a do-it-yourself scenario in which individuals self-insure their personal longevity for the entire period until age 95; a deferred annuity scenario in which individuals purchase an annuity to address longevity risk from ages 85 to 95; and a third scenario in which individuals purchase an immediate life annuity upon retiring at age 67.
The report called the DIY scenario the costliest alternative and noted a typical mid-level earner at age 67 would require US$1,050,000 in funding. By comparison, the deferred annuity option scenario would require $760,000 in funding and the immediate life annuity scenario would require $652,000.
To show how the plan would work when the target-benefit accumulation is greater or less than required, the report also analyzed both a shortfall and excess of $100,000 in plan accumulations at age 50. It found the plan would better protect individuals by positioning them to adjust savings rates up or down as needed.
The plan could also support employers’ talent attraction and retention strategies by providing retirement benefits and savings solutions that adjust to meet the changing needs of workers, said the report.