Do State and Local Government Employees Save Outside of Their Defined Benefit Plans When They Need To?

As state and local policymakers enact benefit cuts to reduce the cost of their pension systems, the life-cycle model suggests that workers will adjust by saving more on their own. But, whether workers actually respond to pension characteristics remains an open question. After all, income received far in the future may not be salient to young workers deciding how much of their earnings to consume in the present. To answer the question, this paper links the Survey of Income and Program Participation to the Public Plans Database and explores whether state and local workers consider the amount of their pension savings, the funded status of their plan, or their Social Security coverage when deciding whether to participate in a supplemental defined contribution (DC) plan. The paper found that: ¥ Employees whose pensions provide less income are more likely to participate in a supplemental DC plan, but the effect is small. ¥ Members of poorly funded pension plans are not more likely to participate in supplemental plans than members of well-funded plans. ¥ Employees without Social Security coverage are not compensating with greater participation in supplemental plans. The policy implications of the findings are: ¥ If state and local employers are forced to further curtail their pensions, employees are unlikely to replace that income with outside savings. ¥ In the event that poorly funded pension plans end up reducing retirement income for current employees, those employees are unlikely to have been saving more in anticipation. ¥ In short, states and localities Ð especially those whose workers are not covered by Social Security Ð should not count on outside savings to replace pension income.