This month, the Center for Retirement Research at Boston College released a brief entitled, “Do Benefit Cuts Encourage Public Employees to Leave?” Their findings indicate that benefit cuts to current employees cause employees to leave the public sector for private sector employment.
The brief analyzes the 2005 reform of the Employees’ Retirement System of Rhode Island (ERSRI). Facing higher pension costs, Rhode Island instituted a reform for future employees and current employees participating in ERSRI who had not yet reached the ten-year vesting mark. The reforms included raising the retirement age, reducing the multiplier that determines benefits, and capped future COLA payments. At the end of the day, state actuaries determined that the benefit reduction would reduce future pension costs by $243 million.
Although the state achieved the savings it was looking for, the Center for Retirement Research found that over a four year period, the pension reform caused a 2.4-percentage-point increase in the fraction of non-vested employees who decided to leave for the private sector. Once the reform was enacted, public employees saw a reduction of overall compensation because the cut in pension benefits was not offset by an increase in salary. Additionally, with these departures the state had to face the prospect of human resource costs: recruiting and training new employees to take the jobs of those leaving.
Previously, we’ve written about benefit reductions and plan changes that ultimately hurt the recruitment and retention of public employees. For instance, in 2012, Palm Beach, Florida decided to close all of its public pension plans and move current employees to a hybrid defined benefit contribution plan. In response, Palm Beach experienced an exodus of police officers and firefighters over the next four years. The loss of employees ended up costing the city upwards of $20 million in training costs. In 2016, to right their wrong, Palm Beach retired to defined benefit pensions for their police officers and firefighters.
There is ample evidence that benefit reductions and plan changes have drastic effects on recruitment, retention, and new employee training costs. Before making these changes, state lawmakers should find other revenue sources if they need to shore up their pension costs.