The Staying Power of Pensions in the Public Sector

Source: Beth Almeida and Ilana Boivie, California Public Employee Relations, no. 195, May 2009
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The recession that has gripped California’s economy has created intense pressures on public sector budgets, where officials are forced to meet demands for greater services in the face of declining tax revenues. Pressure on employee compensation, especially retirement benefits, is growing. The falling stock market has damaged the value of assets set aside in state and local pension funds. In turn, this may intensify efforts by taxpayer groups to dismantle traditional “defined benefit” (DB) pension programs for public employees.

But policymakers would be wise to proceed with caution. Employers — whether in the public or private sectors — use retirement plans to create incentives that enhance their human resources objectives. DB pensions are an effective retention tool, and government employers are well-suited to offer them. At the same time, DB pensions are highly valued by public sector employees. Moreover, as other states have learned, replacing a DB plan with a system of individual retirement savings accounts can have unintended consequences.

This article explores why DB plans have “staying power” in the public sector, from the perspective of employers, employees, and taxpayers. It concludes that pensions are an effective way to meet the objectives of all three stakeholder groups, suggesting that the public sector ought not to mimic the private sector trend away from DB pensions.

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