During Economic Downturn, Nearly All State & Local Employers Modified Pensions Rather Than Switching to Alternative Plan Designs
WASHINGTON, D.C., November 14, 2012 - A new research brief examines the workforce impacts of existing defined benefit (DB) pension plans to assess the likely effects of a switch to defined contribution (DC) individual accounts or cash balance plans. "The Great Recession: Pressures on Public Pensions, Employment Relations and Reforms" finds that:
- Public employers would attract a different labor force if they switched retirement benefits away from pensions. Public employees would be less committed to employers and thus less likely to invest in nontransferable skills that are critical to delivery of taxpayer services.
- Employee turnover would increase under individual DC accounts and cash balance plans. These types of retirement benefits no longer defer compensation into the future and thus offer fewer economic incentives for employees to stay with public employers.
- Moving from a pension structure would result in higher cost for public employers and employees because of higher investment and administrative costs for alternative retirement plans.
- Public employers and employees overwhelmingly choose to stay with pensions rather than moving to alternative benefits when faced with a choice, illustrating the high value of pensions to public sector employers and employees.
"The Wall Street crisis hurt all investors, including pension systems that saw drops in their funding levels," said Diane Oakley, executive director of the National Institute on Retirement Security. "As a result, policymakers in nearly every state examined and enacted large-scale reforms to their workforce retirement plans - and nearly every state and locale maintained its pension plan. The research finds that this outcome isn't surprising because private and public pensions have a strong track record of simultaneously meeting employers' recruitment and retention needs and employees' economic security needs," Oakley said.
Christian Weller, study co-author and public policy professor at the University of Massachusetts-Boston and senior fellow at the Center for American Progress said, "State and local budgets are under intense scrutiny. Spending on public employee retirement benefits in particular is caught in the crossfire of these fiscal and political debates." Weller continued, "There are some proposals for a radical switch from pensions to individual savings plans. Our research suggests that policymakers understand the value of existing pensions as recruitment and retention tools. They also are worried about the substantial costs of switching retirement plans. It is no surprise that policymakers generally rejected proposals to radically alter retirement benefits."
"The study underscores the key role of pensions as a human resource management tool," said Ilana Boivie, report co-author and research economist for the Communications Workers of America. "Employers in all sectors leverage pensions to reduce attrition of skilled employees. These employers are rewarded with better employee recruitment and retention. For example, 69% of employees with pensions say their retirement plan is an important reason to stay versus only 37% with DC plans. Also, employers with pensions have lower turnover rates ranging from 20 - 200% lower as compared to those employers with DC plans," Boivie explained.
The research brief is available here.