Public sector employees don’t seem aware of major pension reforms over the last decade
Particularly new hires, whose defined benefit plans are likely to be less generous than their longer-tenured co-workers, are not preparing adequately for retirement, says report.
Most public sector workers in the U.S. have seen their retirement benefit packages change but appear not to have changed their spending and saving behavior to fit these new retirement saving strategies, a new study has found.
The findings were published in a new study by the Public Retirement Research Lab and J.P. Morgan Asset Management. The Public Retirement Research Lab (PRRL) is an industry-sponsored collaborative effort of the Employee Benefit Research Institute (EBRI) and the National Association of Government Defined Contribution Administrators (NAGDCA).
Officials with the groups said the study shows that many in the public sector have not adapted to a pension landscape that has evolved in recent years.
“It appears that households with public sector employees participating in a defined contribution (DC) plan whose primary employer-sponsored retirement plan is a defined benefit (DB) plan feel more comfortable spending than those whose primary employer-sponsored retirement plan is not a DB plan,” says Craig Copeland, EBRI Wealth Benefits Research Director. “This comfort level may be short-sighted for households with newly hired public sector employees, as the generosity of the DB plan is likely to be less than what it is for longer tenured employees or was for retired individuals. As a result, the households with new hires may not be preparing adequately for retirement.”
A changing landscape
Since the recession of 2008–2009, states have made many reforms to the pension plans offered to public sector workers. More than a decade ago, in 2010 and 2011, a total of 45 states enacted major pension reforms in this area, the researchers noted. Workers did not come out ahead with these changes. The report’s authors said that there are estimates that newly hired workers who end up having 30 years of tenure would have an average reduction in benefits of 7.5% relative to those hired before the changes.
“As a result of these structural changes, newly hired public-sector employees’ benefits will often be different (lower in most cases when different) than their longer- tenured colleagues’. In addition, the presence of DC plans allows these employees to save on a tax-preferred basis to supplement their DB plan,” the report said. “Therefore, it would be expected that public-sector employees under newly reformed retirement plan regimes would have spending and saving behaviors that differ from those of public- sector employees under the older and, typically, more generous benefit regimes.”
Key findings
The study listed a number of key findings, which include:
- Households with a primary defined DB plan spend more than households with a hybrid or primary DC plan.
- Public sector households are, at the median, spending at or above their net income.
- Savings rates in DC plans are correlated with the type of primary employer-sponsored plan (e.g., defined benefit, defined contribution, or hybrid).
- Households with employees with a primary employer-sponsored DB plan are less likely to contribute to a DC plan.
- The presence or absence of Social Security coverage appears not to have an impact on spending behavior.
The study concludes by saying the public-sector employees could benefit from more education about retirement plan offerings, especially newer employees. Financial wellness or similar programs would be beneficial to helping employees understand how the benefit plan structure can impact spending now and, in the future, and the potential need to save more.
“These research findings point to the importance of public sector employees understanding their retirement benefits package holistically to make an informed decision about spending and saving in order to achieve retirement success,” says Kelly Hahn, defined contribution strategist at J.P. Morgan Asset Management. “Plan sponsors have an important role to play here, by helping their employees understand the generosity of their DB plan and any lack that may need to be addressed through the use of a DC plan.”