During the year 2002, I was a firsthand witness to a historically unprecedented pension experiment that took place in the state of Florida. Every one of that state's more than 500,000 public employees—in addition to every new employee joining the state's payroll—was given the option of converting their traditional defined benefit (DB) pension plan into an individually managed defined contribution (DC) account. The DC investment plan was similar to a corporate-style 401(k) plan, under which the employee has full control over asset allocation and investment decisions. Florida's new Public Employee Optional Retirement Program (PEORP) was the focus of intense scrutiny by local and national media. This is because it was the largest such pension conversion in the history of the United States and was viewed by many observers as a potential laboratory for Social Security reform. Although at first the take-up rate for the DC plan was low, it is now estimated that over half of the state's new employees have decided to forgo the traditional DB pension and instead enroll in the DC investment plan.

This large-scale transition from DB pension to DC accounts is not limited to the state of Florida or the United States alone. A number of other states— including a failed attempt by California Governor Schwarzenegger—have proposed converting their public employee DB plan into either a mandatory or optional DC plan. Several countries around the world—starting most prominently with Chile in the mid-1980s—have introduced DC-style pension savings accounts as an alternative to traditional DB pensions.