A pension is a retirement system that gives state employees a designated monthly payment from the day they retire until death. When the Virginia Retirement System (VRS) was created in 1942, people could begin collecting their retirement fund at age 65 and lived, on average, to age 66. This was costly but affordable. Now, people live to about age 78 and the state cannot afford to give them a pension for, on average, 12 extra years. Americans are living longer lives, causing people to collect retirement funds for a longer span of time than the original system was designed to accommodate. Collecting retirement funds for a longer time than budgeted for has caused the system to become depleted and unfunded. The Commonwealth decided to make the fiscally responsible decision and reform the Virginia Retirement System.
The Commonwealth eliminated the pension for all newly hired employees and adopted a hybrid model that imitates private-sector retirement systems that gives employees more flexibility on how to save their money for retirement. The hybrid model will be partially a pension system and partially a 401k system. (Note: a pension is an amount of money that a retiree gets every month for life and a 401k is a set amount of money a person receives when they retire). By combining the two, the Commonwealth was able to reduce unfunded liabilities by $9 billion, strengthen the program, and protect its long-term health.