After the 2007-2009 Great Recession, state lawmakers had to salvage public employee pension plans. Republican and Democratic lawmakers came together to make tough choices, and every state has approved some type of pension reform since 2010. Texas in particular serves as an excellent example of what can be achieved when robust policy debates lead to bipartisan compromise. While the lessons learned from this overhaul are not completely comparable to what will be needed to deal with the fiscal crisis soon to face Social Security, they can serve as something of a reform road map for federal lawmakers.
By 2021, Texas’ Employees Retirement System (ERS) faced a $14 billion funding shortfall and what consultants called “a strong possibility” that the plan would become insolvent at some point in 30 to 40 years. Unlike Social Security, where insolvency triggers a benefit cut, insolvency risk in Texas falls entirely on the taxpayers. If the pension runs dry, full payments to retirees would be made from the general fund, resulting in a quadrupling of the annual pension cost and chaos for the state budget.
To avoid this outcome, lawmakers enacted legislation that raised state contributions by more than $500 million per year while establishing a new, lower-risk pension plan for future state workers. This package reversed the plan’s trajectory toward insolvency and instead put it on a path toeliminating the pension-funding shortfall over 30 years.
The legislation modernized the benefit structure by establishing a “cash balance” pension for new workers — a flexible hybrid plan that provides a guaranteed interest rate with an upside to additional returns if the market grows — shifting them away from the costly traditional defined benefit plans that left the state on the hook for market instability. This design provides a powerful tool for state workers to safely accumulate retirement savings while greatly reducing the risk that taxpayers will be asked to bail out ERS again.
Even for states that didn’t go as far as Texas and instead opted to maintain the underlying defined benefit structure, this framework of pairing contribution increases with benefit reforms has beencommon across the country since 2010. These changes, which distributed the burden of paying down pension debt, were frequently approved with bipartisan support in red and blue states alike.
These reforms and the bipartisan nature in which they were passed are examples Congress should look toward as it faces Social Security’s looming insolvency. It may not be politically popular, but federal lawmakers will need to craft a compromise solution that brings program revenues and expenditures back into alignment through adjustments to both sides of the ledger. There are only so many ways to make the books balance.
What should not be lost amid the inevitable negotiations is that Social Security has been on this unsustainable trajectory for decades, and Congress has been unwilling to make the structural reforms necessary to change it. Now is the time for leadership. Lawmakers must craft a plan that reduces the size of scheduled benefit cuts in the near term while modernizing the system to ensure long-term fiscal sustainability and retirement security for America’s most vulnerable senior citizens.
What we have learned from state pension reform makes the agenda for Congress clear: Pulling Social Security back from the brink will likely require both more resources and changes to the benefit structure. Lawmakers have an opportunity to strengthen and modernize an essential source of retirement income while overcoming its long-standing reputation as the third rail of American politics, and they should look to the states for guidance.
Chris McIsaac is a fellow with the governance program at the R Street Institute, a Washington, D.C.-based think tank engaged in policy research in support of free markets and limited, effective government. Previously he served as a pension policy consultant with the Pew Charitable Trusts, providing technical assistance to state and local governments seeking to improve pension sustainability.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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