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Research

Pension Reform Hurts Public Sector Competitiveness

Report says pension cuts reduce the public sector’s ability to compete for new employees.

By Michael Katz

A new report exploring the effects of pension reform on state and local government competitiveness in the labor market has found that pension benefit cuts have hurt governments’ ability to attract new employees. 

“It is well known that pensions are a significant component of public sector compensation,” said the report, which was published by the Center for State and Local Government Excellence, a non-partisan, non-profit organization. “Hence, without offsetting wage increases, recent pension cuts may make public sector employers less competitive in the labor market.”

After the stock market crash of 2008 decimated the funded status of pension plans, many state and local governments enacted pension reform that reduced the benefits for new and current workers. The report tracked the number of benefit cuts made by the largest 160 pension plans on the Public Plans Data Website between 2005 and 2014, which are the plans and years for which data on benefit cuts were available.

“Cuts were relatively uncommon before the stock market crash of 2008,” said the report, “but quickly became more prevalent as plan sponsors realized the extent of the deterioration in their funded ratio.”

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According to the report, common changes included increasing the normal retirement age, reducing the monthly benefit that workers will receive when they retire, requiring employees to contribute more to the pension fund, and reducing post-retirement cost-of-living adjustments. It also found that most of the cuts applied only to new hires because many states consider future accruals of pension benefits for current workers to be contractual obligations that can’t legally be reduced.

The cuts aimed at newly hired workers typically increased the normal retirement age and reduced the final-average-salary and benefit multiplier. And because cutting benefits for current employees is more difficult, both legally and politically speaking, cuts for this group generally entailed lower cost-of-living adjustments, and requiring higher employee contributions.

The report also noted that another change made by some pension plans was to add a defined contribution (DC) component to the traditional defined benefit plan.

“Unlike the other reductions, it is unclear whether these new hybrid plans qualify as benefit reductions since workers—particularly the young and mobile—might prefer portable savings accounts to traditional pensions,” said the report. “Still, because plans often reduce defined benefit multipliers when adding a DC component, they may be viewed as cuts in many cases.”

Overall, the report found that the research results imply that the public sector had trouble hiring and retaining the same type of workers it used to after a benefit cut

“While future research should continue to explore the effect of pension cuts,” said the report, “states and localities should at least consider how benefit cuts might affect worker recruitment and retention.”

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Home > News > Regulation > Swarthmore Students Vote to End Ethical Investing Ban
Regulation

Swarthmore Students Vote to End Ethical Investing Ban

Referendum calls for social objectives to be factored into investment decisions.

By Michael Katz

Swarthmore College students this week voted overwhelmingly in favor of a referendum to reverse the school’s 27-year ban against considering social issues as part of the endowment’s investment decisions.

The referendum, which was introduced by climate activism student group Swarthmore Sunrise, passed with 87% in favor of removing the ban, with 40.7% of the student body voting.  It calls for the school’s board of managers to remove a clause from its investment guidelines requiring that the investment committee manage the endowment so as to “yield the best long-term financial results, rather than to pursue other social objectives.” The guideline was established in 1991, not long after the college had divested itself from South Africa over its racist apartheid policy.

The referendum makes two demands for the college’s board of managers: It insists a discussion of the repeal of the 1991 ban must be on the agenda for the next board meeting, which is scheduled for May 11 and May 12, and it says the ban must be replaced with a holistic investment policy that takes into account both long-term financial results and “Swarthmore’s commitment to social responsibility.”

According to Swarthmore campus newspaper The Phoenix, the board has historically not made policy changes from similar student initiatives. Last year, the student group also held a referendum calling for partial divestment from fossil fuels. Although 80.5% voted in favor of that referendum, the board decided not to divest. The paper said the last time the board fulfilled the terms of a student referendum was in 1994.

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“What the school has told Sunrise for the past few years has been ‘oh, we can’t divest because we have this policy in place,’” Sunrise member Aru Shiney-Ajay ’20 told The Phoenix. “Our decision was, if that’s the reason we’re given, these are the terms we’re going to talk about.”

Sunrise leaders met with Swarthmore President Valerie Smith earlier this month prior to publicly introducing the referendum. Smith reportedly said during the meeting that she promised she would bring it up at the May board meeting if the referendum passed.

“We have been in contact with her since and have confirmed that she will personally present it to the board, though perhaps not necessarily express her opinion on it,” Sunrise member September Porras Payea wrote in an email to The Phoenix. “Ultimately the president of the college is hired by the board, so her influence is limited, but this is a big step in comparison to past conversations.”

Meanwhile, Greg Brown, Swarthmore’s vice president for finance and administration, opposed repealing the ban in an op-ed published in The Phoenix.

“Changing the investment policy to make a moral statement with no tangible effect could have the effect of diminishing performance and reducing funding available for critical mission-centric initiatives such as financial aid and academic programs,” Brown wrote.

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