Evaluating U.S. State Pension Policy

Abstract

We use an overlapping generations framework to evaluate the impact of state pension reform on public and private workers, and apply this analysis to all fifty U.S. states. We consider (i) closing the pension plan to new entrants, (ii) reducing pension benefits together with wage increases and (iii) suspending cost-of-living-adjustments (COLAs). While each reform effectively reduces long run taxes, variation in fiscal and demographic features creates significant differences in state outcomes. Closing the plan to new entrants generates the most even distribution of welfare gains across job sectors and age cohorts, while COLA suspensions prove particularly harmful to public workers.

Keywords: state pension, retirement systems, lifecycle, overlapping generations

JEL Classification: D60,E62,H70,J11