Do Benefit Cuts Encourage Public Employees to Leave?

Publication Date: May 2019

Publisher: Center for Retirement Research at Boston College

Author(s): Laura Quinby; Gal Wettstein

Research Area:

Keywords: Financing Retirement

Type: Report

Coverage: United States

Abstract:

A number of state and local pension systems have persistently low levels of funding. These poorly fund- ed plans in places like Kentucky, Illinois, and New Jersey may eventually reduce bene ts not only for new hires, but also for current employees. The question is: do cuts to pension bene ts encourage a state’s public sector workers to leave for the private sector?

This brief, based on a recent paper, evaluates a 2005 reform of the Employees’ Retirement System of Rhode Island (ERSRI) that cut core bene ts for state employees and teachers without raising salaries to compensate. It examines whether these bene t cuts for current employees encouraged them to separate from the government, investigates whether teachers (an important and often-studied group) reacted dif- ferently to cuts than other workers, and explores the possible consequences for public services.

The discussion proceeds as follows. The rst section outlines Rhode Island’s history of pension re- forms and describes the 2005 legislation. The second section introduces the evaluation methodology and quanti es the e ect of the 2005 reform on employee separation. The third section addresses the poten- tial costs of an employee exodus. The nal section concludes that bene t cuts encourage government workers to leave their jobs – particularly non-teachers who may have more options in the private sector – but that the size of the response is small relative to the budgetary savings from the reform. Nevertheless, government employers should consider the human resource cost of reduced compensation when analyzing potential pension reforms.