Association for Public Policy Analysis & Management

Efforts to reform the retirement plans provided to state and local government employees are gaining momentum across the country. Yet, the debate has focused almost exclusively on the financial problems of public pension plans, drowning out a broader discussion of how well these plans serve government employees, employers, and taxpayers. For example, the central mission of the public pension system is to provide retirement income to government employees, yet most public plans provide little retirement security to government employees who do not spend a full career in public service. As a result, they may not appeal to the increasing number of younger workers who expect to switch jobs several times over their career. Many traditional final average salary (FAS) pension plans penalize work at older ages by reducing lifetime benefits for employees who remain on the job past the plan’s retirement age, encouraging them to retire even if they remain productive and want to keep working. These retirement incentives are increasingly problematic as the population ages and the pool of younger workers stagnates.

This study examines the likely impact of recent pension reforms on the distribution of future retirement benefits. It simulates future benefits under the benefit rules in the place before and after the reforms for a sample of state-administered plans that, between 2008 and 2014, altered the way they compute future pensions. The analysis uses a unique database of benefit rules for state-administered plans compiled by the Urban Institute. The results show that reforms significantly cut future benefit levels and raised the number of years that employees must work before their pensions are worth more than the value of their required plan contributions. The reforms also increased work incentives at older ages.