Pension Reform News: Impact of pensions on recruiting and retaining public workers

In This Issue:

Articles, Research & Spotlights 

• Pensions Not the Solution for Retaining Employees in Alaska
• Very Few Public Employees Qualify for Pensions
• Public Employees Prioritize Pay Over Retirement Benefits
• Public Pensions Are for Retirement, Not Fostering Local Economies

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Alaska Pension Proposal Unlikely to Fix Recruiting Woes

To address the growing challenges of attracting and keeping police officers, firefighters, teachers, and other public workers, Alaska legislators are considering bringing back a similar public pension to the one abandoned over 15 years ago. Testifying on Senate Bill 88 before the House State Affairs Subcommittee, Reason Foundation’s Pension Integrity Project detailed the potential $9 billion in additional costs that this move could add to future budgets and what impact policymakers could expect the bill to have on recruiting and retention. There is little evidence that the pension changes would be enough to counter ongoing national and state trends in worker behavior, which show higher turnover rates and less long-term loyalty to individual jobs. As a result, it is hard to justify the possible $9 billion price tag of SB 88.

Nearly Half of Public Employees in Defined Benefit Pension Plans Will Never Receive a Payout

Public pensions have been typically designed to maximize retirement benefits for employees who stay for 30 years, often to the detriment of the more representative employees who usually work for a single employer for only a few years before changing jobs. Many public pension plans fail to provide benefits that would help make these workers self-sufficient in retirement. Examining the steep benefit requirements of public pensions, Reason Foundation’s Rod Crane explains that pension vesting policies and frozen assets that do not grow with inflation do most public workers a major disservice in building their retirement security. In fact, research shows that only about 35% of hired government workers earn a pension that is not significantly reduced by inflation or forfeited entirely through demanding vesting requirements.

The Key to Attracting Public Workers Is Pay, Not Pensions

All government employers are adjusting to the growing challenges of an evolving workforce. New hires are less likely to stick around for their entire career, and most of today’s workers will work for many different employers over their lives. Lawmakers in several states are promoting defined benefit pensions as the solution to counteracting this trend, but research shows that this approach will have little to no impact on the decisions of young employees. In this column for Governing, Reason Foundation’s Jen Sidorova examines several recent studies that suggest there is no correlation between the type of retirement plans offered (a pension, defined contribution plan, or other alternative plan) and the level of employee retention a public employer can achieve. Instead, studies show that public workers are more likely to respond to salary increases and other improvements to job satisfaction.
Interview: The Key to Attracting Public Workers Is Pay, Not Pensions. -Jen Sidorova

Public Pension Funds Should Avoid Local Economically Targeted Investments 

Policymakers often view public pension assets as an opportunity to foster growth in their local economies, but as Reason Foundation’s Steve Vu points out, this is a dangerous distraction from the role of these funds. Retirement savings placed in a public pension fund are gathered from employees and employers (taxpayers) under the expectation that these funds will be managed with the singular goal of maximizing investment returns at an acceptable level of risk. While it may be tempting to direct these pension funds in ways that might benefit one’s local economy, history shows that these investment decisions come with significant drawbacks and financial risks.

News in Brief

Establishing a Uniform Framework for Fiduciary Duty in Public Pension Funds

A University of Colorado Law Review paper by Danilo Risteski examines the impact of state-level environmental, social, and governance (ESG) regulations on public pension funds, as pensions have been increasingly used to promote political agendas of all sorts. Texas passed anti-ESG laws prohibiting investments in companies it claimed were boycotting fossil fuels and discriminating against the firearms industry, while Maine mandated divestment from fossil fuels to prioritize environmental concerns. These political approaches complicate compliance for investment firms and risk compromising retirees’ benefits. The paper argues for standardizing fiduciary duties across states to focus on beneficiaries’ financial security rather than political goals. To achieve this, Risteski recommends that state legislatures adopt laws similar to the Employee Retirement Income Security Act of 1974 (ERISA), ensuring a uniform, retiree-centered framework for public pension funds. This would involve making investment decisions based solely in terms of risk-adjusted returns and long-term financial stability. The full paper can be found here.

States Adjust COLA Policies to Balance Costs and Sustain Public Pensions

A recent National Association of State Retirement Administrators report evaluates how states have altered pension cost-of-living adjustments in response to evolving economic conditions. The report highlights that 17 states have changed cost-of-living adjustments (COLAs) for current retirees since 2009. Kentucky and New Jersey suspended annual COLAs until specific funding thresholds are met, while Alabama and Texas implemented ad hoc COLAs requiring legislative approval. These cost-saving adjustments reflect a broader trend aimed at ensuring the long-term sustainability of public pension plans as inflation erodes retirees’ purchasing power. By tying COLAs to factors like plan funding levels or specific inflation indices, states aim to manage fiscal burdens and extend the longevity of their pension funds. The full paper can be found here.

Quotable Quotes on Pension Reform 

“The public was completely unaware of this. … You’ve potentially got the legislature making some decisions that have direct financial implications for the city, and there’s been no local discussion, no assessment of what it would cost the city.”
— Bureau of Governmental Research Executive Director Rebecca Mowbray on the undoing of 2016 cost-saving reforms intended to make the firefighters’ pension financially sound, quoted in “New Orleans firefighter pension controversy is back eight years after landmark settlement,” Nola.com, May 11, 2024.

Data Highlight

Each month, our team of analysts generates a pension-related chart or infographic of interest. This month, we are showcasing a graph from Reason Foundation’s Rod Crane on the impact of inflation on the purchasing power of pension benefits. Crane argues that benefits accrued in traditional defined benefit plans can quickly lose value over time, which significantly cuts into retirement for many workers who leave for other job opportunities after a few years. You can access Crane’s full analysis here.

The post Pension Reform News: Impact of pensions on recruiting and retaining public workers appeared first on Reason Foundation.