Stephen Eide at the Manhattan Institute in a recent paper discusses the connection between pension cost volatility and public staffing levels. The paper finds that although private-sector job employment has long surpassed its pre-recession levels, state and local government staffing remains lower than it was in 2008.
Rising pension costs are part of the problem. According to the paper, if pension costs had stayed the same as a share of general revenues since 2008, states and localities would have been able to employ about 200,000 more full-time employees. And If pension costs had grown as the same rate as general revenues since 2002, the public staffing levels would have exceeded the pre-recession peak.
Unfunded past service liabilities, not increasing benefits, are the cause of the growing pension costs. In fact, benefits on average are now less generous than they were a decade ago. The current structure of prefunding pension benefits exacerbates the vulnerability of government budgets to market volatility, by raising required contributions to pay for unfunded liabilities at the same time that the tax base shrinks and welfare spending swells. This mechanism reduces the flexibility of managing staffing levels.
Pension reform however could not tame pension cost volatility in the near term, as most reforms concern only future unearned benefits, not past service costs.
Read the full paper here.
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