Has Pension Reform Gone Too Far?
Faced with growing pension gaps, states and localities in recent years have reacted with sweeping reforms.
Nearly every state in the union and scores of localities have reacted in recent years to their growing unfunded public pension liabilities with reforms that aim to soften that financial burden in the coming decades. The changes have ranged from reducing benefits for current retirees to raising the retirement age to establishing new (read: cheaper) plans for incoming public employees.
But have some of these reforms gone too far? Might governments now be putting themselves in a position where they can no longer attract the best person for the job?
“Plans have actually done a lot,” Alicia Munnell, director of the Center for Retirement Research, said at the Future of Retirement Summit this week in Washington, D.C. “And in some cases, in my view, they’ve done too much.”
Munnell and others noted that, if the cuts states and localities made to their pension plans hold, the cost to governments will certainly be less in the future. But those cuts are “not a costless thing to do,” Munnell said. The center’s research has consistently shown that compensation in the public sector and compensation in the private sector have been roughly comparable because more generous benefits packages for public workers tend to make up for lower pay. But when governments start cutting benefits, private-sector jobs gain the edge.
“So when you start cutting back on pension benefits, without thinking of them in terms of total compensation package, you risk ending up with a compensation system that falls short of what’s happening in the private sector,” Munnell said. "It has to be recognized that these [pensions] are just one part of compensation and when you do this you have to think of the whole package.”
Indeed, the notion is on governments' radar as employee retention is one of the top concerns for public employers, according to a recent survey by the Center for State and Local Government Excellence (SLGE), which hosted the retirement summit. Among the governments surveyed by SLGE, 70 percent said that staff retention and development were important issues looking ahead.
What's exacerbating that retention issue is a poor opinion of government workers, said Joshua Franzel, SLGE’s vice president of research. “What often comes up as being a persistent problem is the public perception of workers,” he said, “and how that impacts those that otherwise might stay in public service but instead choose to retire.”
Franzel noted that as localities have rebounded from the Recession, his research has shown an uptick in the number of retirements in the state and local sector. The public worker perception has been a contributing factor to that, as has the notion from workers that they should retire before their employer changes their benefits on them, Franzel said.
That environment can make it difficult to attract the best talent for those positions as they open. Munnell noted one of her center’s studies looked at how cutbacks could affect the quality of teachers that school systems were able to attract. The study used the average SAT score at teachers’ undergraduate institutions as a measurement for teacher quality and related that to wages and benefits paid at their respective school districts. The result? “You just got teachers from higher quality schools if you paid more,” Munnell said, adding that the example can be extrapolated across most government jobs.
“All the teacher slots, all the public employee slots will be filled,” she said. “But they will be filled with less competent people than you would have had otherwise if you keep compensation equal between two sectors.”
Certainly, municipalities are working on ways to attract the best and brightest by offering other perks. In Montgomery County, Maryland, Human Resources Director Joseph Adler said the county offers a highly competitive management development program in coordination with Johns Hopkins University and a deferred retirement option (DROP) program as recruitment tools. The county is also “looking at” flexible work hours and teleworking for some employees, but those perks can bring challenges.
“There’s a tremendous amount of resistance to telework from middle level managers who believe that the employees who want to telework are going to be goofing off, running around in their pajamas and flip flops and they’re not going to be working," Adler said. A second “path of resistance” he added, is jealousy from employees like bus drivers or receptionists who, by nature of their jobs, can’t telework.
Still, he said, the brain drain that some managers worried about hasn’t come to fruition, he said, and it’s giving the county time to thoughtfully approach recruitment and retention.
“Several years ago, it was every single baby boomer, the minute they hit 62, they’re going to walk out on you. That has not happened,” said Adler, a veteran of state and local human resources. “They’re still there – I’m still there.”