EUROPE - European governments should ditch final salary pension schemes in favour of career-average structures, according to Peter Diamond, the Nobel economist who sat on a commission to investigate reform of Massachusetts' public-sector pensions.
"You can set it up on average to be as generous as a final salary one - the point is that, you're choosing other parameters as well," he said in an interview with IPE earlier this week.
"If you change the career average but nothing else, you've made it far less generous when what you should be doing is making it fairer."
Although the Massachusetts commission favoured the end of the final-salary structure, like its UK counterpart, it recommended the retention of the defined benefit structure because it provides members with secure post-retirement income, leaves investing to professionals and allows governments to adapt to risky outcomes slowly over time.
Defined contribution schemes, in contrast, relied on individual investment decisions.
Diamond - who has also made recommendations to China on reforming its pension system - said reformers needed to base decisions on strong data that had been available to the recent UK reform commission, but not to his earlier one.
"We didn't feel we had evidence on how much employees were actually paid," he said. "Massachusetts had a rather tight contribution rate in comparison with some other states, but that's not a basis for a decision, so we ended up not addressing that issue."
He added: "It was a funny commission to begin with. There were only two outsiders - all others were politicians or employees, so there was a certain amount of dancing around."
Vested interests, he said, will prevent implementation of the US commission's proposals.
"They haven't addressed the central issue of career average pensions - nor will they, because the unions don't like it, and the unions have a lot of say, although they're in the process of losing it big time on health benefits for retirees."
Despite the risks, Diamond said he favoured "balanced" reforming commissions that included politicians.
"It's a radical change for rather subtle intellectual reasons. That's a hard sell," he said. "You need to sell it to the politicians, and the right kind of politicians will do a better job of selling it to politicians than academics will. Having a mix is good."