How important to recruiting is a traditional pension plan?

Government employee recruitment often relies on the appeal of the mission. Still people want to be paid and have some financial security. A recent study of state and local emergency response employment seems to indicate one important factor in attracting job candidates, namely having a defined benefit pension plan. Tyler Bond, research director for the National Institute on Retirement Security joins  the Federal Drive with Tom Temin.

Interview Transcript: 

Tom Temin
So tell us, I think I know or can guess what the answer is. But are the existence of defined benefit pension plans important to recruiting public sector employees?

Tyler Bond
Yes. The evidence that we’ve seen through a number of reports strongly suggest that defined benefit pensions are essential for recruiting and retaining public sector employees, especially those public sector employees who work in public safety. So police officers, firefighters, corrections officers, other public safety employees really value the reliability and security of a defined benefit pension. And our new report, I think really speaks to that.

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Tom Temin
One of the reasons possibly, as you outlined in the report, is that these types of employees tend to complete their career and retire on that benefit that was offered at their point of employment to a much greater degree than those in the private sector.

Tyler Bond
Yes. Certainly, what we saw with the public safety employees is that once they start working for the fire department or the police department, if they make it past the first few years, they’re very likely to stay through a full career and retire from that plan. Now, it should be said that, especially in the case of a firefighter, a career may be 20 years. And so often what you’ll see is a firefighter who has a second career. Sometimes they begin that second career while they’re still firefighting, sometimes they start that second career after firefighting. But yes, we do see that in our research, we found that 52% of 25 year old new hires are expected to retire from the pension plan that they join when they begin their public safety career.

Tom Temin
Now, this was based on survey of those people that are the recipients. Did it also include the view of recruitment viability of the hiring organizations?

Tyler Bond
So we collected data directly from 28 state and local public pension plans. So we’re using the plans own data about the behavior of their employees. But I think we’ve seen in the real world that employers are realizing the value of a defined benefit pension. So in Connecticut, there’s a town called Trumbull, Connecticut that in 2014, close their defined benefit plan moved all their police officers into 401k style defined contribution plan. At the end of last year, after less than a decade of having their police officers in the defined contribution plan. The town council in Trumbull voted unanimously to reopen the defined benefit plan. And so starting this year, police officers will go back into the defined benefit pension plan. And we’ve seen up in Alaska, they closed their two statewide public sector pension plans on July 1 of 2006. So 18 years ago to the day, and most police officers and firefighters in Alaska participate in one of those plans. And they’re reaching crisis levels of staffing shortages in Alaska right now because of the lack of a defined benefit pension plan. So to give you a concrete example, the city of Fairbanks, Alaska does not have police officers on patrol between 8am and noon every day because they’re so understaffed in their police department. And the lack of a pension is not the only factor, but it is a contributing factor to that staffing shortage.

Tom Temin
Well, I guess everything is in the details. That leads to a couple of questions. But first, let me remind people who we’re speaking to. Tyler Bond is the research director for the National Institute on Retirement Security. And briefly, do you have any evidence or hunch as to whether these results are projectable to federal level law enforcement and public safety and first responders?

Tyler Bond
So we’ve seen that the federal government has retained a pension for its employees for decades now, even when the system was reformed in the 80s and the Civil Service Retirement System was closed in favor of the Federal Employees Retirement System. It still retained a defined benefit pension component to that system. So I think at the federal government level, as well as at the state and local government levels, there is a recognition that it’s important to maintain a defined benefit pension in order to recruit and retain employees who want to make a career out of public service. There’s data from the Bureau of Labor Statistics that suggests that the average tenure for a public sector employee is twice the average tenure of a private sector employee. I think the public sector, especially in certain professions, has really retained that career employment model. And having a pension helps to bolster that.

Tom Temin
Right. When they went from [Civil Service Retirement System (CSRS)] to [Federal Employees Retirement System (FERS)], the pension got much smaller as a percentage of top three salary years and so forth with the added provision of Social Security, and then the TSP and so forth. So you have that kind of three legged stool which exists in most municipalities, I guess. So the question is, what is the correct percentage for the people that have to bear the burden of this pension cost? Is it 100% of the salary for the rest of their lives. Is it 80%? That would seem to be a crucial question. How much is the pension?

Tyler Bond
So it’s very uncommon, in my experience, to see a pension that awards 100% of salary at retirement, the exact amount varies from plan to plan. And I think it’s important to keep in mind that it’s the local stakeholders, the plan sponsors that set those amounts. And so they look at what their workforce needs, and they determined provisions of their pension plan benefits in accordance with what their workforce needs.

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Tom Temin
Well. Let me ask you about the affordability side, because when the federal government doesn’t have an affordability problem, because it can print money without regard to whether it actually raises that money in revenue, that is not available in general to state and local governments, unless they want to float bonds, which are probably not great fiscal policy for paying pensions. But you look at some of the places like Chicago or some of the big Midwestern states where upwards of 25, 35, almost 50% of revenues they raise are going to public pensions and health care benefits. There’s no money left for the schools, roads, bridges, etc. How do we get around that in the long term?

Tyler Bond
So most state and local government pension plans are well funded, a lot of plans have been moving in an upward trajectory in recent years. Most state and local pension plans received the majority of their revenue from their investment earnings. On average, it’s only about a quarter of revenues into the plan that come from taxpayer dollars in the form of employer contributions. Where we see the outliers in places like Chicago and Kentucky and elsewhere. There’s really a history of underfunding the pension plan that goes back decades. And that is largely contributing to the problem there. The money wasn’t put in when it should have been. And that’s contributing to the problems they have now. It’s not really a flaw in the design of the plan itself, because we see so many other plans are doing well. And there’s a number of plans that are at or above 100% funding today.

Tom Temin
So the lesson then is have a funding strategy that doesn’t depend ever and ever increasingly on year to year revenues to keep your pension going.

Tyler Bond
That’s right. Just like anyone saving for retirement, you have to put in the money and let that money grow over time. So it’s there for you when you retire. A pension, the same logic applies, you need to contribute the money so that money can be invested and the investment earnings can grow since they represent such a significant portion of plan assets. If the money’s not put in, then that’s when we see plans tend to get into trouble.

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