Document date: July 16, 2012
Released online: July 16, 2012
Twenty-somethings fresh out of college or graduate school may need to rethink starting jobs in state government, cautions a report from the Urban Institute's Program on Retirement Policy. The new recruits could end up paying for their state’s unfunded pension liabilities without much to show for their efforts.
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Ninety-two percent of full-time state and local government workers in 2011 had access to a defined benefit retirement plan, the traditional pension that promises a set stipend from retirement until death. With state pensions underfunded by an estimated $2.7 trillion, however, many governors and legislators are seeking to close the chasm by increasing employee contributions, raising the age at which benefits become available, or reducing the plans’ generosity. While lowering pensions’ net costs to states, these shifts may make it harder for states to modernize their workforce.
In “Are Pension Reforms Helping States Attract and Retain the Best Workers?” Richard Johnson, Eugene Steuerle, and Caleb Quackenbush use New Jersey’s Public Employees Retirement System and its five waves of reform since 2007 to show how state pensions provide little incentive for young workers to join the state’s workforce, lock in middle-aged workers even if they are unproductive or unhappy, and push many older, seasoned workers into premature retirement.
The actuarial assumptions underlying reforms in New Jersey and some other states, the Urban Institute researchers explain, rely on contributions from new and younger employees to help pay off unfunded liabilities owed to workers hired before the reforms. New workers who don’t stick around “will get back only their own contributions plus interest, but compounded at a lower rate of return than the state assumes it will earn on plan assets.” In a sense, these reforms attempt to partially protect taxpayers and older workers already in the plans by shifting costs to the young, including future state employees.
Young workers who leave their jobs with fewer than 25 years of service “forgo nearly all retirement benefits from the employer. The more mobile the workforce and the stronger the desire to maintain the option of changing careers or moving to another state, the more this benefit structure discourages workers from entering state employment.”
Workers in their forties, on the other hand, “stand to reap enormous pension windfalls by remaining on the payroll at least until they qualify for early retirement, so very few quit even if the job is not a particularly good fit.” The plan essentially pushes workers past 60 into retirement because they forfeit a quarter or more of their pay each year they continue on the job. As the authors point out, inducing still-productive older workers to retire early makes little sense with the workforce aging and the supply of younger adults expected to stagnate soon.
The bottom line, say Johnson, Steuerle, and Quackenbush, is this: “Only those who stay for several decades but don’t work much beyond retirement age will come out ahead, and even they will largely have financed their own retirement benefits.”
While there is no perfect pension plan, the researchers recommend that states try to combine the best features of defined benefit plans and 401(k)s, including annuities to protect retirees against outliving savings, and equal-work-for-equal-pay mechanisms that avoid discriminating against the younger and the more-seasoned employees.
Two related briefs -- “How Pension Reforms Neglect States’ Recruitment and Retention Goals” and “State Pension Reforms: Are New Workers Paying for Past Mistakes?” -- have also been issued. The Alfred P. Sloan Foundation funded the three publications.
The Urban Institute is a nonprofit, nonpartisan policy research and educational organization that examines the social, economic, and governance challenges facing the nation. The Program on Retirement Policy addresses how current and proposed retirement policies, demographic trends, and private-sector practices affect the well-being of older individuals, the economy, and government budgets.
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