North Dakota Achieves Extraordinary Pension Reform
These reforms will serve as a model for successful, sound pension reform for the rest of the country.
On April 29, North Dakota Governor Doug Burgum signed a historic pension reform bill into law protecting public employees and taxpayers from growing unfunded liabilities. House Bill 1040 closes the state’s existing defined benefit plan and enrolls new hires into a defined contribution plan starting January 1, 2025. House Bill 1040 also puts $200 million into the closed defined-benefit plan to help pay down existing unfunded liabilities.
The Peace Garden State joins the ranks of Alaska, Michigan, and Oklahoma by switching to a full defined contribution public retirement system. Sound pension reform is one of the key solutions mentioned in the ALEC Essential Policy Solutions for 2023 and discussed in every edition of the ALEC annual report on unfunded pension liabilities, Unaccountable and Unaffordable.
As the North Dakota Public Employees’ Retirement System (NDPERS) closes in January 2025, we can expect some old myths about sound pension reform resurface.
MYTH: Enrolling New Hires in Defined Contribution Retirement Hurts the Current Plan
FACT: Defined benefit pensions are designed to be fully funded on a yearly basis. Unlike Social Security, public pensions are not based on new workers subsidizing older workers. These pensions are funded by employee contributions, employer contributions and investment earnings. Enrolling new hires in a defined contribution slows the growth of liabilities in the current plan.
This also increases predictability by stabilizing contribution rates for the long term. By stopping the growth of unfunded liabilities, NDPERS asset growth will be able to outpace liability growth through contributions from employees and taxpayers. Without unfunded liabilities growing rapidly, plan managers can focus on consistent investment return growth rather than chasing returns, reducing NDPERS exposure to financial risk.
MYTH: Enrolling New Hires in Defined Contribution Retirement Hurts Employees
FACT: Defined contribution retirement plans provide a secure and portable option to public employees. Public employees enjoy greater security because their retirement savings are placed in a personal account where they are in charge of their retirement investments! They do not have to worry about plan managers playing politics with their retirement investments.
Closing NDPERS will help the state keep the promise to public employees by ensuring the ability to pay 100% of the retirement benefits earned and accrued by active workers and retirees. Defined-contribution savings also follow employees as they change jobs. The Bureau of Labor Statistics notes that Americans born between 1980-1984 held an average of 8.6 jobs between the ages of 18 to 34, with over half of these jobs being held between the ages of 18 and 23. As Americans change jobs more frequently than in previous generations, defined contribution offers retirement savings that follows them throughout their career.
As noted by the Reason Foundation, NDPERS was suffering from massive amounts of employee turnover. Offering a more portable retirement plan, such as the defined contribution plan in HB 1040, should greatly increase employee retirement savings.
MYTH: Enrolling New Hires in Defined Contribution Retirement Hurts Taxpayers
FACT: Defined contribution is more affordable to taxpayers than defined benefit pensions. The total costs of a defined benefit plan (the normal cost for the year plus unfunded liabilities from previous years) are greater than employers matching contributions for a defined contribution plan. Taxpayers will not have to pay more into a defined benefit plan once its closed unless they want to pay down unfunded liabilities faster than the current payment schedule. By adding $200 million to NDPERS, the state is ensuring that the existing unfunded liabilities will be paid off in a timely manner.
ALEC applauds the work of the North Dakota state legislature and Governor Burgum for passing historic pension reform. These reforms will serve as a model for successful, sound pension reform for the rest of the country.