As public pension debt across the country increases, the retirement security of millions of public employees could be in jeopardy. One would expect that public workers might respond to this pension crisis by increasing their own retirement savings outside of their government-provided pension plan, but, in practice, this is rarely the case.
In a recent paper, researchers at the Center for Retirement Research (CRR) used Survey of Income and Program Participation (SIPP) data to look at whether the amount of pension savings, the funded status of a pension plan, or a worker’s Social Security eligibility had any effect on state and local workers’ decisions over whether or not to participate in a supplemental defined contribution (DC) retirement savings plan.
Supplemental defined contribution plans are a vehicle of personal savings that provide additional retirement income, often through a pre-tax arrangement with an employer or third-party financial firm. This is a great tool for public sector workers who are looking to bolster their retirement income. Although specifics and enrollment requirements of supplemental plans vary from state to state, across the board they offer participants more control over their investments than traditional defined benefit plans.
The Center for Retirement Research study found that employees whose pensions are less generous than the national average are more likely to participate in a supplemental retirement plan, but the statistical effects of this are small in magnitude. They did find that members of poorly funded pension plans are no more likely to participate in a supplemental savings plan than members of well-funded plans. Social Security participation also does not seem to have an effect on savings as employees without Social Security did not participate in an outside savings plan at a higher rate than individuals who are not elidable for Social Security benefits.
The authors also found that decreases in required employee contributions to a pension fund are predicted to increase an employee’s participation in a supplemental savings plan. Simply put, if the employee is required to put only a small amount of their paycheck toward their pension plan they are more likely to invest more of that paycheck into another savings vehicle. When it comes to interpreting these findings, it is important to note that decreases in employer pension contributions do not necessarily translate into pension funding issues, so those motivations are not straightforward. Contribution rates can change for a variety of reasons, including a plan reaching full funding.
The authors share a few concerns about their findings.
Second, the authors note that because workers whose pensions are among the worst-funded are no more likely to save than workers whose pension plans are the best-funded, they may be financially unprepared if future benefit cuts are enacted to shore up a pension system.
Third, Social Security participation not having any effect on supplemental savings may be a sign that ineligible workers may be less prepared for retirement than those that are eligible for social security benefits.
It is important to note that defined contribution supplemental plans are available to only some public sector workers and as a result, these findings might be in part driven by the availability of supplemental plans from state to state.
This research highlights the fact that public sector workers are not prepared to adjust their savings in response to the poor funding of their pension plans. In addition, this has again highlighted that the public is relatively unaware of how the fiscal health of their plan impacts their pension checks. Financially-unprepared workers in combination with uncertainty around future benefits could create a highly volatile fiscal climate for future retirees. Pension plans across the country should prioritize getting their funding on track to alleviate some of this uncertainty.
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