How Have Pension Cuts Affected Public Sector Competitiveness?

The stock market crash of 2008 substantially reduced the funded status of state and local pensions, prompting many sponsors to cut benefit levels. Common changes have included increasing the normal retirement age, reducing the monthly benefit th at workers will receive when they retire, requiring employees to contribute more to the pension fund, and reducing post-retirement cost-of-living adjustments. It is well known that pensions are a significant component of public sector compensation. Hence, without offsetting wage increases, recent pension cuts may make public sector employers less competitive in the la bor market. This brief investigates whether such an effect has occurred. The discussion is organized as follows. The first section describes several common pension reductions and outlines reasons why pension cuts may affect worker recruitment and retention. The second section explains the methodology used to estimate the relat ionship between pension cuts and the labor market competitiveness of public sector employment. The third section presents results from this exercise and finds that workers hired after benefit cuts had earned less in the private sector than similar worke rs hired before the cuts occurred. The final section concludes that pension cuts appear to reduce the ability of public sector employers to compete with private sector employers for workers. While future research should continue to explore this area, the finding does indicate that states and localities should at least consider how pension cuts might affect recrui tment and retention.