Public Sector Pensions and the Covid-19 Shock

Abstract

The 2020 Coronavirus Aid, Relief, and Economic Security Act (CARES) awarded $200 billion in federal aid to the states to support spending for core areas including general relief, education, and mass transit. As revenue pressures mount in the coming months Congress may provide further aid to state and local governments.

Nevertheless, financial support for key services such as health, welfare, and public safety should not be allowed to morph into a more generalized bailout of state and local pension plans. The most serious pension funding gaps are largely the result of failures to undertake meaningful pension reforms over the course of the past decade. Any future federal aid packages that might be used to meet pension plan obligations should be conditioned on structural pension reforms.

Conditions for federal assistance should include a de-risking of public pensions’ overly aggressive investment strategies, a freezing of pension plans to future benefit accruals, and the establishment of alternate defined contribution retirement plans for affected public sector employees.

Keywords: government pensions, retirement accounts, healthcare, coronavirus, coronavirus pandemic, COVID-19, public health, economics, quarantine, economy, economic crisis

JEL Classification: H55, H75, H51, I00, I18