Pensions are a promise. In fact, pensions are a form of deferred compensation. Public sector employees- such as teachers, firefighters, and nurses- accept lower salaries during their working years in exchange for monthly contributions from their employer toward their pension. As we explored previously, these employer contributions are added to the employee’s own contributions and investment returns from the pension fund. The employee receives back this deferred compensation as a monthly benefit in retirement. This ensures that after dedicating a career to public service, they will be able to retire with dignity. Since pensions are a form of deferred compensation, they are also a contractual obligation. In most states, this protects pension benefits for current workers and retirees from harmful cuts.
When irresponsible politicians attack pensions, they attempt to sell out the future generation by making steep cuts in retirement benefits for new workers hired after a certain date. Rather than making hard choices to address state budget issues, like eliminating corporate tax giveaways or asking wealthy individuals to pay their fair share in taxes, they shortchange public employees. It’s happening right now in Pennsylvania.
What does this mean for future generations? When you hire that 25 year old firefighter a year from now, the fact that his pension benefit will be half of what it would have been doesn’t have an immediate impact. But in 30 years, when that firefighter retires after serving his community, he’s going to be left with less retirement security and more of a struggle to make ends meet. Many younger workers are already struggling with unprecedented levels of student loan debt. They are delaying major life decisions like buying a home and having children due to financial instability. Taking away their retirement security only increases the economic burden they face.
In San Jose, the city faces a shortage of police officers after a controversial measure to gut pensions was passed. Utah abandoned its traditional defined benefit pension and adopted a hybrid plan in 2011. Recent economic research shows that in Utah “affected employees also began leaving their jobs at a faster rate.” Defined benefit pensions have long been a part of the compensation package for police officers, firefighters, and other public employees. Abandoning pensions will make it difficult for cities and states to attract the best and the brightest.
We already know that defined contribution 401(k)-style plans favor the wealthy and fail the middle class. If politicians continue to move younger, new public employees into 401(k)-style plans, they will only exacerbate the growing inequality between the wealthy and the middle class. When governors, legislators, and other lawmakers consider ways to provide retirement security for public employees, they must remember that providing a pension now means a safe and secure retirement for future generations.