Are Pension Reforms Helping States Attract and Retain the Best Workers?

Richard W. Johnson, C. Eugene Steuerle, and Caleb Quakenbush
Publication Date: 
July 2012

Recent budget pressures have led many states to reexamine their long-term commitments to pension plans for teachers, first responders, and other state workers. Many of these reforms increase required employee contributions, raise the age at which benefits become available—at least to new employees—or otherwise reduce the plans’ generosity. However, policymakers seem mainly focused on net costs to the state and not on how retirement benefits might best be allocated among state employees—the young, middle-aged, and old—to attract and retain the best workers. 

Traditional pension plan design, which these reforms often retain, deters this focus because it nearly always violates the principle of equal justice by providing unequal pay for equal work. It discriminates, albeit legally, against many younger and senior workers, discouraging them from either entering or continuing with public service. Meanwhile, many middle-aged workers, regardless of skill level, become locked into government employment because they would forfeit temporarily high pension benefits and, hence, total compensation by leaving before retirement age. Unless states address this problem, their pension reforms—regardless of revenue saved—will make it harder for them to modernize their work force to meet the needs of
21st century government.  

This paper uses New Jersey as an example to show that the actuarial assumptions underlying some state pension reforms rely on contributions from new and younger employees to pay off unfunded liabilities owed to workers hired before the reform. Thus, rather than benefiting from any state contribution to their pensions, many new workers are scheduled to be net contributors over their careers. That is, they 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.