How Retirement Provisions Affect Tenure of State and Local Workers

Public sector defined benefit pension plans are based on final earnings, so those with long careers receive substantial benefits and those who leave early receive little. This pattern of back-loading could reflect an optimal design whereby plan sponsors want to attract and retain workers who will stay with their employer for their entire career. But to the extent that state and local governments benefit from a diverse workforce comprised of both short and long-tenure workers, the current system may be poorly designed. A full career in the public sector may be optimal for both the employer and the employee in some situations, but in other instances shorter periods of employment may be more desirable for both parties. For example, social workers, who face burdensome caseloads and constant stress, are often exhausted long before retirement age. These workers need to move to new jobs in either the public or private sector. Therefore, a plan that disproportionately rewards long-service workers may lead some to stay who would be much better off elsewhere. This brief uses a data set generated from actuarial valuations to see whether back-loading does indeed bind workers to their plans. The analysis exploits the fact that: 1) some public employees are covered by Social Security and some are not; and 2) some public employees are required to also participate in a defined contribution plan and others are not. The question is whether those who have these alternative sources of retirement income – which substantially reduce backloading – are less likely to stay until the earliest age of eligibility for full benefits.