Pension Reform News: Most public employees leave before vesting in pension plans

In This Issue:

Articles, Research and Spotlights 

• Most Public Workers Don’t Stay Long Enough to Vest in Pension Systems
• Georgia’s Teacher Pension Plan Needs Reform

News in Brief
Quotable Quotes on Pension Reform
Data Highlight
Contact the Pension Reform Help Desk

Articles, Research & Spotlights

Most Public Employees Leave Before Vesting In Their Pension Plans

Public pensions are designed to build guaranteed lifetime benefits for those who have spent a career working and contributing to the pension fund, but very few employees who begin working in a government job stick around long enough to generate a substantial pension benefit. A new analysis from Reason Foundation’s Mariana Trujillo, Steven Vu, and Truong Bui explores the rates at which new hires leave 12 different state public pension systems. While there are variations in how plans expect to be able to retain members, they all assume a significant exodus within the first five years, resulting in most new hires (approximately 62%) leaving before even vesting their pension benefits. Only 25% of public workers stay longer than 15 years, which is concerning because it usually takes more time to secure a pension benefit exceeding what an employee could earn with a defined contribution retirement plan. 

Policymakers Should Consider Reforms for Georgia’s Teacher Pensions

The Teachers Retirement System of Georgia (TRS) has made some prudent adjustments to its actuarial assumptions in the past few years, which should reduce the chances of future insolvency. Despite these changes, TRS is still in need of significant reform to avoid future unexpected costs in government budgets and from taxpayers. The system’s debt has ballooned to $27.7 billion, with the plan seemingly unable to surpass a funded ratio of 80% for over a decade. Due to longstanding unfunded liabilities, the cost on school districts is more than twice that of 15 years ago. TRS requires teachers to work for at least 10 years before they can vest and secure a pension benefit, a hurdle that less than 35% of new hires are expected to reach, which raises more concerns. With such high vesting requirements, most teachers entering TRS are unlikely to generate adequate savings for retirement. Georgia lawmakers need to consider major reforms to better fund TRS and modernize the retirement benefit offered to new teachers.

News in Brief

Public Pensions Are Less Effective Than Better Salaries at Retaining Employees

A recent study by Barbara Biasi, published by the Yale School of Management, examines the relative effectiveness of defined-benefit pensions and salaries in retaining public-sector employees, using the case of Wisconsin teachers and the impact of the 2011 Wisconsin Budget Repair Bill (Act 10). Act 10 implemented significant reductions in both salaries and pensions for public school teachers. The findings reveal that teachers are four times less responsive to changes in pensions compared to equivalent changes in salaries, indicating that pensions are less effective at retaining employees. The study concludes, “teachers are significantly more responsive to changes in salaries than they are to changes in pension benefits along the substitution margin.” The study estimates that 800 additional retirement-eligible teachers would have been retained had Wisconsin opted to cut pensions instead of salaries. The full paper can be found here.

COVID-19 Did Not Lead to Early Retirement, but Major Life Events Do

A recent paper by Zhikun Liu, David Blanchett, Qi Sun, and Naomi Fink, published by the MissionSquare Research Institute, explores the discrepancies between expected and actual retirement ages among older Americans, revealing a significant gap. Despite the COVID-19 pandemic, retirement expectations remained largely unchanged before and during the pandemic, but many individuals retired earlier than anticipated, often due to health and wealth factors. The study finds that poor health typically leads to earlier retirement, while wealth can delay or hasten the decision. Additionally, changes in marital status and lower educational attainment are associated with earlier retirement. The full paper can be found here.

Quotable Quotes on Pension Reform 

“The single most important reason we have the fiscal crunch that we have today, is that pensions — our pension liability — is impacting our ability to provide core services.”
— Jim Reed, former Scotts Valley, California mayor, quoted in “Explainer: Public pension debts in Santa Cruz County” Santa Cruz Local, Aug. 9, 2024. 

“If the probability (of fully funding the pension) won’t be too good, now is the time to take care of it, not 10 years from now when the hole is too big,” 
— Jack Tate, former Colorado state senator, quoted in “As gloomy PERA projection raises concern, officials caution against drastic reactions” TheDenverPost.com, Aug. 3, 2024. 

“The returns on crypto (when good) are much higher than any conventional instruments. Of course, when the returns are bad, they are more extreme — with various coins dropping to zero value. […] Whether it’s appropriate for a retirement fund, or what fraction is appropriate, is something that depends on the guidelines of the specific fund.”
—Gina Pieters, economics professor at the University of Chicago, quoted in “Michigan pensions to the moon? Fund dips toes in Bitcoin. Will it pay off in the long run?” DetroitFreePress.com, Aug. 5, 2024. 

Data Highlight

Each month, we feature a pension-related chart or infographic of interest generated by our team of analysts. This month, we are showcasing Mariana Trujillo, Steve Vu, and Truong Bui’s retention curve graph, which plots the percentage of newly hired public employees expected to be still employed at different years of service. The graph reveals that most public employees exit their roles before their pensions vest, challenging the notion that pension benefits effectively retain workers. You can explore their full analysis here.