An oft-cited argument in favor of generous public pensions is that it helps the public sector recruit and retain high-quality workers.
But is that the case? That question is the subject of the latest report from the Center for Retirement Research at Boston College.
The findings of the report, as summarized by the CRR:
– Research shows that pensions help recruit and retain high-quality workers; thus, cutbacks in public pensions could hurt worker quality.
– One indicator of quality is the wage that a worker can earn in the private sector.
– Using this measure, states and localities consistently have a “quality gap” – the workers they lose have a higher private sector wage than those they gain.
– The analysis shows that jurisdictions with relatively generous pensions have smaller quality gaps, meaning they can better maintain a high-quality workforce.
– The bottom line is that states and localities should be cautious about scaling pensions back too far.
The report talks further about the correlation between cutting pensions and a widening “quality gap” between the public and private sector workforce:
As states grapple with challenges facing their pensions, many have taken steps that reduce benefit generosity for their new employees. The analysis suggests that states and localities with relatively generous pensions should be cautious, because reductions in benefits may result in a reduction in their ability to maintain a high-quality workforce. To the extent the quality gap already exists for many of these employers, reducing pension generosity may widen the gap.
A couple of caveats are important. First, some variables that may be correlated with both the quality gap and generosity of pensions – e.g., health insurance benefits – were not included in this analysis due to data limitations. If these factors (rather than pension normal costs) drove the result, then changes in pension benefits may have more muted effects than estimated here. Second, the non-linearity in the result is intriguing, but its source unclear. Why do plans at the bottom of the generosity distribution have smaller quality gaps than plans in the middle? Will reductions in these plans have any effect on the quality gap? Future research will seek to shed light on both the causality of the main result and on its apparent non-linearity.
Read the full report here.
Photo by Kate Hiscock via Flickr CC License