by Carl A. Hess, Thomas J. Healey, Kevin Nicholson
January 09, 2014
A redesigned benefit structure is the most promising opportunity to reduce pension costs and, therefore, pension underfunding. We calculate a required accrual for pension benefits each year at 22.5 cents for every dollar of salary. Increasing the retirement age to 65 reduces pension costs from 22.5 cents for every dollar of salary to 16. 8 cents (a savings of 25.3 percent). Changing the final average compensation base to the course of a career cuts pension costs from 22.5 cents to 15.1 cents (a savings of 32.8 percent). Removing the cost of living adjustment reduces pension costs from 22.5 cents to 17.2 cents (a savings of 23.5 percent). In the unlikely case that all three of these changes were implemented, annual pension costs could be reduced by 62 percent, from 22.5 cents to 8.4 cents per dollar of salary.