An updated research brief from the National Conference on Public Employee Retirement Systems (NCPERS) reveals that defined-benefit (DB) plans offer significant advantages for public employees, employers, and taxpayers over defined-contribution plans (DC) plans.
Below, we summarize three significant findings from the report that show why policymakers should continue maintaining DB plans.
1. Switching newly hired public employees into a DC plan does not result in cost savings for state and local governments and offers less retirement security for public employees.
In the first part of its study, NCPERS examined the argument that enrolling public employees into a DC plan would produce cost savings for state and local governments. However, NCPERS illustrated several instances when the opposite occurred. In 2013, for example, the San Diego City Employees’ Retirement System closed its DB plan and placed public employees into a DC one instead. By cutting off a dedicated source of revenue for the DB plan, the net cost to the city of San Diego increased by $56 million.
A similar story occurred in West Virginia. In 2005, the state allowed public teachers with a DC plan to transfer into the State Teachers’ Retirement System, which offers a DB pension. The West Virginia Consolidated Public Retirement Board’s actuary projected that switching into the DB plan would save West Virginia $1.8 billion over 30 years, as the DB plan required a lower employer contribution.
The brief also found that DC accounts do not offer the same level of retirement security for public employees as DB pensions. Unlike a DB plan, investments in a DC account are not pooled collectively, leaving retirees more vulnerable to the ups and downs of the stock market. The administrative and investment costs for DC plans like 401(k)s are also four times higher than their DB counterparts. These costs, according to NCPERS, “are borne directly by individual plan participants through deductions from their DC accounts.” As a result, NCPERS showed that a DB plan will provide roughly three times more retirement savings than a DC plan.
2. DB pensions are a critical tool for the recruitment and retention of qualified public employees.
Another key section in the report supported the assertion that pensions help state and local governments recruit and retain public employees. For example, in the education and public safety professions that require high levels of stress and/or physical activity, workers can often earn more in the private sector to provide these services. This makes offering a DB pension a critical incentive to retain these employees.
NCPERS also cited a presentation from the Center for State and Local Government Excellence (SLGE) that demonstrated how altering a DB plan can lead to recruitment and retention challenges. The presentation included research from the Center for Retirement Research at Boston College, which examined the effects of changing DB pensions (including cutting benefits or moving newly hired public employees into a DC plan) from 2005 to 2014. The brief illuminated that these benefit changes harmed the ability of state and local governments to recruit and retain public employees.
3. DB pensions serve as valuable economic multipliers for state and local communities and also create tax revenue for these areas.
Last but certainly not least, NCPERS reaffirmed that the spending of pension benefits provides a consistent fiscal boost to state and local economies.
According to a study from the National Institute on Retirement Security (NIRS) this year that was included in NCPERS’ brief, pension spending generated $675 billion in economic output throughout the nation, and this spending supported 3.6 million American jobs. Recent research from NCPERS also explained that state and local pensions produced $341 billion in state and local tax revenue in 2018. Furthermore, the NCPERS research also noted that public pensions are revenue positive, as they generated $179 billion more than the taxpayer contribution in the same year.
This updated research brief from NCPERS is further proof that pensions are cost-effective, help state and local governments recruit and retain public employees, and fiscally benefit areas across the country, all while providing the retirement security our hard-working public employees deserve for serving our communities.