Most public pension plans operate using a basic model: employees contribute through an automatic paycheck-deduction, the employer pays its annual required contribution, and the combined money is invested and earns interest which earns more interest. When a public employee retires, he or she begins receiving a monthly check.
Public pensions are pre-funded. Retiree benefits are not paid on a pay-as-you-go basis out of state and local governments’ general revenues, but rather from pension trust funds. That is, a significant portion of the assets needed to fund pension liabilities is accumulated during an employee’s working life and then paid during the participant’s years in retirement.
NASRA supports the professional management of that trust. As conditions change, states enact public pension reforms that modify benefit calculations, contribution rates, plan structures, and many other provisions. In turn, these modifications affect funding policies, investments, and governance. Additional considerations for today's public retirement systems include the economic effects of benefits distributed and the effect of pension finances on state credit ratings.
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The above illustration was modeled from one prepared by the late David P. Hayes who practiced in the employee benefits area for Milliman in Omaha, Nebraska.