Lessons from failed pension reform

Path, Beach, Sand, Boardwalk, Dock

We spend a lot of time talking about the savings crisis in the United States.  We’ve written about the unfunded liabilities in 401(k) plans, we’ve written about the lack of financial literacy, and the dangerously low retirement account balances across the country.  And while all of this might lead to the conclusions that having a defined benefit plan, like LAGERS, is an important cornerstone to retirement security in America, pension reform debates still often favor the significant reduction or elimination of defined benefit plans altogether.   

At a recent roundtable event, I heard from Diane Oakley, with the National Institute on Retirement Security.  She presented a case study of a city in Florida that did just that.  Following the 2008-09 economic downturn, in an effort to reduce their growing pension expenses, the City of Palm Beach enacted a drastic cut to their pension benefit while adding a 401(k) component as a replacement.  The move was estimated to reduce the city's retirement benefit cost by 45%, and while contested, many felt it was a reasonable compromise to realize real savings for the city's strained budget. 

What proponents of the reform however failed to measure, was the additional costs that a mass exodus of employees would create in their public safety departments.  As the reform went into effect, the city experienced unprecedented rates of turnover.  Employees left for neighboring communities with more secure retirement options, average tenure dropped dramatically, and the number of open positions the city was unable to fill grew. The result was fewer, and less experienced, officers and firefighters responding to emergencies.

Within a few short years, the city realized that the significant cost of constantly training new recruits, coupled with the serious risks to the public’s safety as the result of staffing shortages, was costing more than they ever imagined.  Within four years of the original reform, the council reversed their course and came back to the table to figure out a new solution that would help the city regain its' workforce competitiveness and rebuild a strained relationship with their public safety force.

My take away from this discussion was not that all pension reform is bad.  Sometimes adjustments need to be made, and a healthy discussion should be had.  But I think this case study shines an important light on how serious the consequences of often well-intend policy decisions can be.  At the end of the day, retirement plans are more than a benefit; they are a workforce management tool that not only help employers recruit and retain high quality public servants, but also help keep turnover costs low and services to our communites high.

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Tagged pension reform, reform, firefighter, police, Value of pensions, value of local government

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