Are Pensions the Answer to the Public-Sector Worker Shortage?
Research shows that pension benefits overwhelmingly help attract skilled workers, especially millennials.
By Bridget Early, Director of Membership and Strategic Alliances, NCPERS
This was originally published on February 13, 2023 in Route Fifty.
It's widely known that state and local governments are struggling to recruit and retain workers. In Maryland, there are about 6,000 job postings available. And in Wayne County, Michigan, another approximately 1,000 jobs are available. These mounting vacancies can threaten the continuity of vital public services in public safety, education and transportation.
But as the number of layoff announcements in the private sector increase and a record number of Americans withdraw funds from their 401(k)s as a result of financial distress, the public sector may be uniquely positioned to reverse its worker shortage with a highly attractive benefit that gives it an edge over the private sector: a pension.
A 2021 brief from the Congressional Research Service shows how participation in defined benefit plans dropped from 30% in the late 1970s through the 1980s to just above 10% in 2020. As employers have shifted toward 401(k)-style plans, retirement security is much harder to attain for the average American. And it shows: a staggering 40% of Americans fear they won't be able to retire at all.
Pensions are Long-Term Solutions for Worker Retention
Recently, state and local governments have offered more incentives like sign-on bonuses and other benefits in the hiring phase to get more applicants in the door. But these are short-term fixes that may temporarily help with attracting applicants but not with retention. Given the high costs associated with employee turnover, a long-term solution is needed.
Research shows that defined benefit pensions already play an important role in worker retention in the public sector. That same study found that 84% of millennials working in state and local governments said their pension benefit was the reason they're staying in the public sector. That's despite the majority (80%) believing they could earn more in the private sector.
These robust retirement benefits are also leading to significant job loyalty: 85% of millennials said they plan to stay in their public sector jobs until they retire. However, 71% said that cutting their pension benefits would make them more likely to leave their state or local government job.
Pensions Can Help Attract Job Applicants—If Positioned Correctly
While public-sector employers typically can't compete with the private sector on salary, they may have an edge when it comes to total compensation packages. It's clear that workers find their pension benefits to be extremely valuable, but it's crucial that the value of these benefits is demonstrated to applicants and new hires. Recent research from MissionSquare Research Institute suggests that by quantifying benefits—such as pensions, life insurance or paid leave—as part of a total compensation package, governments will have greater success in filling vacancies.
With the decline in participation of defined benefit plans in the private sector, many workers do not understand how pensions work or comprehend the value of reliable monthly checks during their retirement. Employers must clearly illustrate the total compensation packages being offered and incentivize retention through continued education on these benefits. Many public employee retirement systems are offering online portals or apps, retirement benefit calculators and educational events or webinars to help members easily understand their benefits.
Cutting Benefits Can Increase Costs in the Long Run
Given the widespread misunderstandings around pension funds, some lawmakers are considering legislation to eliminate these benefits, putting their workforce recruitment and retention efforts in jeopardy. Looking at municipalities that have closed their defined benefit plans, it's clear that eliminating pensions costs public employers both money and quality employees.
Since closing its defined benefit plans in 2005, Alaska has struggled to recruit and retain public employees. Without the incentive of vesting in the plan, “teacher tourism”—where educators gain experience and then move to another jurisdiction, mostly likely with a pension benefit—has become the norm. As a result, the state is spending $20 million per year trying to staff its education system. Recognizing the need to retain public servants, lawmakers are considering reopening the pension plan. On February 2, the Alaska House Committee on Community and Regional Affairs approved a bill that would create a state pension program for police.
Similarly, the Palm Beach Town Council voted in 2012 to close its pension for all employees, including public-safety professionals. Chronic turnover in public safety roles became common as individuals trained in Palm Beach but then accepted jobs in a neighboring district with a pension. Estimates put the cost of this high turnover at nearly $20 million. Lawmakers recognized the negative impacts of closing the town's pension on recruitment and retention, and the council reopened the plan in 2016.
As U.S. workers are increasingly anxious about retirement security and the private sector continues to experience layoffs, the public sector may become more attractive. Through deliberate messaging and ongoing education about total compensation and benefits packages, public sector employers can take advantage of their highly desirable pension benefits to help bring in applicants and retain their skilled employees.