Problems with State-Local Final Pay Plans and Options for Reform

Peter A. DiamondAlicia H. MunnellGregory Leiserson Jean-Pierre Aubry

SLP#12

The brief’s key findings are:

  • Defined benefit plans based on final pay:
    • “backload” benefits, so younger shorter-service employees get virtually nothing;
    • favor those with high earnings growth, who tend to be higher paid; and
    • invite sudden late-career “spikes” in earnings.
  • Moving to career-average earnings would:
    • provide reasonable benefits for younger shorter-service employees;
    • treat high- and low-paid employees more equitably; and
    • avoid late-career spikes in earnings.