Switching to defined contribution retirement plans may not impact public worker retention

Usually, when policymakers consider public pension reforms, they examine the potential impact those changes will have on their workforce. Most research on this subject is dedicated to studying how pension reforms impact the recruitment and retention of public workers. However, it is also important to study how pension reforms affect the decisions of teachers and other public employees as they approach retirement.

Policymakers should examine how the decisions of these veteran public employees can significantly influence both the stability of the pension system and the overall functionality of the public sector workforce.

An Oct. 2022 study by John Brooks of Appalachian State University analyzed the variations of retirement patterns within pension plans and across states from the years 2001 to 2019. Data were gathered from Annual Comprehensive Financial Reports (ACFRs) and actuarial valuation reports across a spectrum of 81 different pension plans in 40 states. This dataset was subsequently merged with information from the Public Plans Database (PPD), a collaborative initiative between Boston College and the National Association of State Retirement Administrators (NASRA). 

Within the data set, the study examined the introduction of 56 instances of new early retirement incentives. The study also accounted for changes in cost-of-living adjustments (COLAs) and pension benefit formulas. Most of the changes to benefits included reductions in benefit generosity. The authors also accounted for the effects of political variables, such as the partisan composition of the legislature, legislative polarization, and the presence of a divided government. 

One key finding was that while decreases in cost-of-living benefits did not significantly influence retirements, increases in cost-of-living benefits led to a notable reduction in the number of retirements. Instances of COLA increases were quite rare within the dataset, though. The study only found 12 occurrences of increases in COLA benefits. Changes in benefit formula generosity had little to no impact on the rate of retirements, according to Brooks. 

Employee contributions, however, emerged as a significant factor in worker retention. Brooks found an increase in public pension contribution rates correlated with an increase in workers retiring. Brooks concluded:

“Higher employee contribution rates are associated with more retirements, suggesting that pensions might lose their personnel power if employees perceive them, alongside continued work, as too expensive”

In contrast, the introduction of new defined benefit (DB) or defined contribution (DC) plans didn’t significantly impact retirement decisions, Brooks found. The study hypothesizes that since “many employees do not know whether their own plans are DB or DC, it is probable that only some employees will notice these types of reforms, much less connect them to their retirement decision-making.”

These findings are important because legislators often worry about the potential repercussions of scaling back on cost-of-living adjustments or introducing alternatives to defined-benefit pension plans. Policymakers’ reluctance to make needed pension reforms often stems from the fear of a surge in retirements and a loss of experienced staff and associated institutional knowledge. This narrative is often pushed by advocates of defined-benefit pensions and unions opposing public pension reforms. Yet, the data from this study indicate that such policy changes may not have a substantial impact on public workers’ retirement rates.

From a fiscal perspective, these insights provide a new perspective on possible strategies for improving the financial health of public pension plans. If curtailing cost-of-living adjustments and introducing alternatives to defined-benefit plans does not, in fact, accelerate workers’ retirement rates, then legislators can likely consider implementing defined contribution retirement plans and other measures without the fear of triggering a mass exodus of experienced employees that may have prevented them from considering these reforms previously. 

It is also worth considering the apparent lack of significant impact from the introduction of new DB or DC plans on retirement decisions. Brooks’ paper suggests that this lack of correlation may be due to employees not being fully informed about the specifics of their retirement plans. Therefore, increased efforts toward educating public employees about the particulars of their plans could be beneficial, ensuring they are making the most informed decisions about their retirement.

Overall, this research reveals some interesting nuances relevant to the current public pension reform landscape amid the debate about worker recruitment and retention.

The study’s finding that changes in cost-of-living adjustments and the introduction of new defined benefit or defined contribution plans have a minimal impact on retirement rates should relieve some reform-minded lawmakers trying to put government-run retirement plans on the path to full funding.

Requiring higher employee contribution rates, however, showed a significant correlation with increased retirements by public workers, according to Brooks. If public employees are more likely to retire when asked to contribute more to the costs of their pension benefits, it gives policymakers something to weigh as they try to retain experienced public sector employees while also making pension plans more sustainable for taxpayers and paying down public pension debt.