A Foolish Take: The Dramatic Pension Cuts by State and Local Governments

In the past, workers generally chose between two paths. Working in the private sector often meant getting a better salary but less attractive fringe benefits. By contrast, public sector employees typically got lower base pay, but the promise of valuable benefits like traditional pensions made the sacrifice worth it for many workers.

Now, that’s changed. Financial pressure on state and local governments has forced them to cut benefits for public sector workers. In particular, according to Boston College’s Center for Retirement Research, newly hired employees saw dramatic cuts in their public pension plan benefits in several areas from the mid-2000s to the mid-2010s.

Data source: Boston College Center for Retirement Research. Chart by author.

Rising retirement and benefit-vesting ages, longer periods for measuring salaries for pension calculation purposes, lower percentages of pay, and smaller adjustments for cost of living increases are all making public-sector pension benefits smaller. At least thus far, cuts have been much rarer among current employees of state and local governments, with employers choosing to make only prospective changes for new hires.

So far, it’s not entirely clear whether reduced public pension benefits by themselves will permanently hurt the ability of state and local governments to find highly qualified employees. The fact that current employees have largely escaped cuts has been a positive for retention. Nevertheless, with pension cuts often coming at the same time as wage and hiring freezes and less extensive health insurance coverage, the days of counting on a government job to provide superb benefits seem to be over.

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