What’s the Value of a Pension Perk?

From Governing:

Katherine Barrett & Richard Greene | June 2011

Tough economic times have made old-style budgeting obsolete for smart managers. In the old days, when times were good, budgeters could simply add a set percentage to the budgets of most departments and programs. And in bad times, they’d just make the appropriate across-the-board cut. But these days, budgeters need to be significantly more targeted when they make cuts; shortfalls are simply too big for simple solutions.

Of course, in order for this to work, managers need to know what the dollars they’re spending are actually buying in terms of real results. There are a number of areas in which this is tricky — few of which are of greater importance these days than retiree benefits for public-sector employees.

It’s conventional wisdom that there’s an awful lot of cash being spent to keep pension promises made to employees during the course of their work life. But what benefits — aside from the obvious humanitarian desire to provide a good quality of life for retirees — are these pensions buying for the entities that offer them?

One argument has been that higher pension benefits make for lower turnover and more qualified applicants. There have been a small handful of studies over the past two decades that support the very broad idea that employees of governments that offer pensions are often more loyal than those working for entities that don’t offer pensions. But even if we accept those assumptions without question, there doesn’t seem to be anyone who can tell us what the marginal value each additional dollar of post-retirement benefits buys — and what we give up if we cut benefits by any given amount.

“I don’t think a lot is known, frankly, as to what the real value of those benefits are,” says Leslie Scott, director of the National Association of State Personnel Executives. “There is really not a lot of analysis or research that has been done on it.” But that isn’t stopping states and localities from tampering with their benefit packages. “The fiscal crisis is so great they are making these decisions based on [bottom-line considerations],” Scott says.

It’s not that folks are being lazy out there. These are extremely hard facts to come by. “It would be very hard to study the impact of a change in benefits on job retention — or new job applicants for that matter,” says Willow Jacobson, a public administration professor at the University of North Carolina School of Government. “There are larger macroeconomic trends that could be driving those things, regardless of the way benefits may change things.”

There’s no question that the economy is probably the biggest single driver of employee decisions. It overwhelms all the potentially positive outcomes achieved by offering a good package of post-retirement benefits. “When the economy is strong, public employers tend to experience higher turnover because better opportunities become available outside the public sector,” says Keith Brainard, research director of the National Association of State Retirement Administrators. “To some extent, the opposite is true when the economy is poor.”

Brainard believes that “a pension plan can help moderate that turnover by creating an inducement in good times to stay with their employer,” which certainly seems to be common sense. And, just out of our own understanding of the way the world works, we tend to agree. But the issue here isn’t whether or not retirement benefits provide value for cities and states. The question — particularly when it comes to cutting them — is how great is that value and how much does a government have to pay to maximize return on investment.

Maria D. Fitzpatrick, a postdoctoral scholar at the Stanford Institute for Public Policy, agrees that “we know very little about what benefits states or local governments are getting for offering these benefits to their employees.” She did make an observation, though, that’s worth considering: In a study of Illinois public school teachers, she found that employees appreciated benefits somewhat less than you might anticipate based exclusively on the actual amount spent on them. Without more and better data, the state simply had no way of knowing how it might re-arrange the kind of benefits it offered to get more out of them in the eyes of the recipients. For example, might the teachers put more value on post-retirement health care in lieu of pension dollars?

There doesn’t seem to be much point in belaboring the little that is known and the vast amounts that aren’t known about post-retirement benefits. Rather, our issue is with the fact that decisions about cutting back on pension plan benefits (or, in the rare case these days, making them more attractive) are being made based more on politics and fiscal exigencies than on any real sense of the longer-term impact of the decisions being made now.

Flying blind like this means governments that have been pushing for steep cuts in retiree benefits are risking a long-term negative change in their workforce that will make services costlier and less effective. By the same token, if cuts at a certain level could be shown to have minimal impact on workforce considerations, then there are a whole passel of states and cities that should consider making cuts without delay.

We don’t know the answer. But we sure believe somebody should.