Pennsylvania taxpayers want reliable public services delivered at a reasonable cost. These public services are provided by trained and experienced Pennsylvanians such as teachers, nurses, paramedics and park foresters. But it's an ongoing challenge for public employers to recruit and retain highly qualified workers to deliver these services.
Government employers have significant disadvantages when recruiting employees. They cannot offer higher salaries typically offered to professionals and managers in the private sector. For example, more than half of public employees in Pennsylvania have a college education, yet data indicate that these highly qualified public employees earn 21 percent less on average than comparably educated private sector employees. In similar comparisons across all workers, public sector pay trails private sector pay by 11 percent to 12 percent.
One management tool that helps public employers stabilize a large workforce is the ability to offer good retirement benefits. Pensions that pay a monthly benefit check based on employee's years of service enable the state of Pennsylvania, for instance, to recruit and retain high quality workers. Because pension contributions are a shared responsibility among employees and employers over the long term, investment earnings pay most of the cost of the benefits. As Eli Leher of the conservative Heartland Institute indicates, public employers "have a strong comparative advantage relative to private industry in offering pension benefits."
The Pennsylvania Legislature is considering a proposal to dismantle the pension system provided to public employees in Pennsylvania in favor of individual 401(k)-type accounts. Not only would this change undermine the ability of middle-class Pennsylvanians to be self-sufficient in retirement, it would threaten the quality of education and public services in the state by making it even harder to keep qualified and experienced employees.
Towers Watson research finds the percentage of workers under age 40 who agree that a pension plan is important in their job choices has soared -- to 63 percent in 2011 from 28 percent in 2009. Pensions also land near the top of workers' "top ten" list of benefits, while 401(k)-type savings plans rank near the bottom. More than three-fourths of new hires say their defined-benefit pension gives them a compelling reason to stay at a job, reducing employee turnover that undercuts productivity.
The financial crisis provided a key lesson about the economic value of pensions. Spending by retirees with predictable pension checks stabilized the struggling U.S. and commonwealth economies. In 2009, retired public employees in Pennsylvania continued to spend their monthly incomes at grocery stores, pharmacies and local restaurants. This cash flowing to private businesses from Philadelphia to Pittsburgh supported nearly 100,000 jobs and $14 billion in economic output. In contrast, retirees with plummeting 401(k) accounts scaled back spending when the economy most needed it.
More than 70 percent of Americans agree that the public sector employees who protect and shape our future should receive a pension. So it is not a surprise that, after the financial crisis, Pennsylvania and nearly every state enacted changes to their public pensions to ensure long-term sustainability and maintain this vital human-resource tool.
Pennsylvania's 2010 Pension Reform Act cut pension benefits for new employees by over 20 percent, reducing employer cost of future pensions to only 3 percent of salaries. Meanwhile, school and state employees contribute more -- 7 percent on average from every paycheck -- to fund their pensions. The Legislature in 2010 also committed to restoring proper funding, correcting for the diversion of pension contributions to other purposes over the last decade. Over time, the 2010 changes will restore Pennsylvania's public pensions to full funding.
Now, lawmakers are considering replacing the pension plan for new employees with a 401(k)-type plan. In addition to making it more difficult to hire and retain first-rate employees, such a path, according to a wide body of research and employer experience, is ill-advised because:
• Closing an existing pension plan to new employees means fewer employees share the cost of existing pension commitments, leaving taxpayers on the hook to make up any difference.
• Switching to 401(k)-type individual accounts would cut retirement income beyond the 2010 reform, leaving Pennsylvania's public servants less able to support themselves in retirement after a career working for the public good.
• Taxpayers would lose the significant cost efficiencies of lower fees and better investment returns achieved by defined-benefit pensions in a switch to 401(k)-type individual retirement accounts.
The workforce and economic benefits of pensions are key factors to consider while examining pension proposals that would undo the 2010 reforms. Experts agree that the 2010 changes will work over time -- if everyone does their fair share.
Given the anxiety 85 percent of Americans feel about retirement, it's no wonder that a similar percentage agree that all workers should have a pension so they can be independent and self-reliant. Real pension reform for Americans should start with better retirement security for all.
Diane Oakley is executive director of the National Institute on Retirement Security.