Pension Cuts Could Hurt Worker Quality

Cuts in public pensions taking place around the country could reduce the ability of state and local governments to recruit and retain top-quality workers, according to new findings by the Center for Retirement Research, which sponsors this blog.

Economists have long argued that pensions and worker quality are related.  Pensions, like paychecks, are a form of compensation, one that particularly appeals to workers with the foresight to value financial security in a retirement still decades away.  And these are often better, more productive workers.

To examine the effect of pension generosity on worker quality, the Center’s researchers first had to find good measures of each.  For worker quality, they used U.S. Census Bureau survey data on workers who have moved between the public and private sectors.  The data show that private-sector wages paid to those leaving government were consistently higher than the private-sector wages of people leaving the private sector to work in government – about 7 percent higher, on average, between 1980 and 2012.  This wage difference represents the “quality gap” among workers.

Each worker was then assigned to a public pension plan and a measure of pension generosity for that plan: the “normal cost.”  The normal cost for public plans operating in the 50 states is the present value of benefits accrued by employees in a given year as a percent of the total payroll that year.

Using these measures, the researchers then examined whether pension generosity had any effect on reducing the quality gap. They found that as public pensions become more generous, the quality gap shrinks, an effect that’s much more pronounced for the most generous pension plans.

The upshot: state or local governments that offer more attractive pension benefits have more success attracting and keeping good workers.