Traditional public sector defined benefit plans were designed decades ago and were structured to reward long-tenured employees. When these pension plans were created, it was common for an employee to remain with one state or one local government employer for their entire career. That is definitely not the case today. As of 2020, the median term of employment for a state government employee was just 5.6 years. So today’s public pension reform efforts should recognize the fact that most government employees are working in public service for increasingly shorter periods of time.
In recent years there have been several examples of cooperative retirement reform efforts that illustrate how maintaining a focus on today’s realities, like typical employment tenure and the amount of income needed for a secure retirement, can support public policy changes that both address the crippling public pension debt governments and taxpayers are facing while also creating an effective retirement plan for today’s modern workforce.
One such effort took place in the state of Rhode Island about a decade ago. Then-State Treasurer Gina Raimondo (now serving as U.S. Secretary of Commerce), took great pains to reach out to public employees across the state to better understand their needs. The state’s pension plan at that time was severely underfunded and at risk of complete insolvency. Raimondo’s outreach resulted in a bipartisan legislative success that produced a new retirement plan design, which addressed the state’s dire financial condition and provided current and future state employees a retirement plan that better meets their needs.
Another successful example of employee-focused pension reform took place with Arizona’s Public Safety Personnel Retirement System (PSPRS). In that case, Reason Foundation’s Pension Integrity Project worked closely with employee unions and state legislators to help design a flexible retirement plan that provided financial security for taxpayers and accounted for the needs of public safety employees.
More recently, this month the Texas legislature passed Senate Bill 321, which improved contribution policies to address the Employees Retirement System’s $15 billion in pension debt and designed a cash balance retirement plan for future state workers that can effectively meet the needs of our highly mobile workforce.
These successful public pension reform efforts have several notable elements in common:
- They considered the realities of a modern, mobile workforce. Recognizing today’s work patterns and the needs of the employees also leads to a retirement plan that is designed to help governments appeal to and recruit highly qualified employees.
- Stakeholder groups, often at odds during pension reform efforts in other states, worked together to develop solutions in states with successful pension reforms. Putting aside ideological differences and focusing on the policy and practical issues facing employees and the states were critical in these successful reform efforts. For example, public employee unions are often unwaveringly dedicated to traditional defined benefit plan designs despite clear evidence that these plans are increasingly less advantageous to the career mobility needs of employees today. The other side of the same coin is that some legislators are convinced that the only meaningful reform involves completely replacing defined benefit pension plans with 401(k)-style defined contribution plans. The successful reform efforts in states like Rhode Island, Texas, and Arizona brought together stakeholders and retirement specialists to craft practical solutions that combine elements of both defined benefit and defined contribution plans to better meet the needs of all impacted parties.
- Finally, these pension reform efforts were successful because the efforts were centered around real, fact-based issues supported by data and realistic financial projections.
Unfortunately, many other pension reform efforts in state and local governments across the country have failed because they lack the elements mentioned above. Often these efforts were not successful because the impacted parties could not get past their ideological preconceptions to compromise or work together to address real issues, including ballooning debt, low employee retention rates, and employee career mobility.
Public pension reform efforts should always begin with the focus on how best to recruit and serve state and local government employees while meeting employer workplace needs in ways that are sustainable for taxpayers. These efforts should rely on current workplace trends where people frequently change jobs, rather than on outdated understandings of the public employment marketplace of decades gone by. With this as a starting point, all parties can move to help achieve comprehensive pension reforms that benefit employers, employees and taxpayers.
Stay in Touch with Our Pension Experts
Reason Foundation’s Pension Integrity Project has helped policymakers in states like Arizona, Colorado, Michigan, and Montana implement substantive pension reforms. Our monthly newsletter highlights the latest actuarial analysis and policy insights from our team.