Government Pensions Should Be Portable, as Well as Sustainable
I was hired by the California Legislative Counsel right out of law school at the age of 25. At the time, I could see myself spending the next several decades there, but I wasn’t ready to commit to the proposition. Unfortunately, in order for my retirement package to be valuable, I would have had no choice but to make a career of it.
California’s retirement system uses a defined benefit plan and would have paid me a generous amount each month during retirement, but only if I spent several decades in the system. If I stayed at my job for less than a decade, my retirement benefit hardly would have been worth the contribution I was paying into the system.
Situations like mine are common where government employees are in a defined benefit system. The following chart illustrates my point by showing benefit growth in the New York City Teachers’ Retirement Plan.
An employee who stays in that system for a full 15 years will only earn $100,000 in benefits, but 15 years later, the value of the benefits will quadruple. These types of formulas often incentivize employees to stay at a job longer than they would like. They also make the position unattractive to new hires who might not want to stay with the job for 20 or 30 years.
Sustainability is the main problem with defined benefit pensions. Unlike with a 401(k)-type retirement system, where an employee invests a definite amount each paycheck and collects the return during retirement, defined benefit plans commit public institutions to vast pension obligations to be paid out years in the future. The discrepancy between promised benefit and actual amount invested means that defined benefit systems are often inadequately funded and can create fiscal crises when pensions mature.
An important side benefit of pension reform is the potential increase in the quality of government workforces. By switching to a more portable system, governments would attract a more experienced and a more diverse workforce. Employees would join government workforces at the middle and end of their careers, bringing valuable private-sector experience with them, and people would feel free to take a government job at the beginning of their careers, even if they weren’t sure they wanted to be there until retirement.