Pension cuts could be costing public sector top workers
Public pension cuts could be making work in the public sector less attractive to prospective employees.
Cuts to public pensions could be having a negative impact on governments’ ability to compete with the private sector in recruiting top workers.
A brief from the Center for Retirement Research at Boston College finds that adjustments to state and local pension plans by sponsors in the wake of the financial crisis, including increasing the normal retirement age, reducing the monthly benefit that workers will receive when they retire, requiring employees to contribute more to the pension fund and reducing post-retirement cost-of-living adjustments, could be making work in the public sector less attractive to prospective employees.
Since pensions make up a significant part of public sector compensation, such negative changes—when not offset by pay raises to make up for those long-term losses—could be making public sector employers less competitive in the job market.
Cuts weren’t common prior to the stock market crash, but afterwards, as sponsors sought ways to salvage their funded ratios, they became increasingly prevalent. However, such a move is not without consequences.
And even though most, but not all, cuts applied to new workers rather than those already employed by the public sector, since “many states consider future accruals of pension benefits for current workers to be contractual obligations that cannot be reduced,” new hires were faced with such measures as an increased normal retirement age and/or a reduction in the final-average-salary and benefit multiplier (the percentage of final-average-salary).
Existing workers, on the other hand, were faced with cuts in the cost-of-living allowance and/or the need to contribute larger amounts to prefund the pension.
While it’s not nailed down that those changes have damaged the competitiveness of the public sector, findings indicate that workers hired after benefit cuts had been put in place had earned less in the private sector than similar workers hired before the cuts occurred—leading to the conclusion that pension cuts appear to reduce the ability of public sector employers to compete with private sector employers for workers.
In studying the rate of workers entering or leaving the public sector after cuts were put in place, researchers found that the data “imply that the public sector had trouble hiring and retaining the same type of workers it used to after a benefit cut.”
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