Although some may argue that pensions are no longer a relevant tool for recruiting and retaining public workers, the historical data and broader research show otherwise. However, with financial literacy being a significant challenge in the United States, it is critical that employers provide the necessary education around these benefits to maximize their potential in the battle to attract and keep talent.
As pensions have become less common in the private sector, they have increasingly become a highly coveted benefit for current and prospective public servants. A 2020 study from the National Institute on Retirement Security examined millennial state and local government employees’ views on their compensation and benefits. The researchers found that a major reason that 74 percent of millennials pursued their role in the public sector was because the employer offered a pension and that 84 percent cited this benefit as a major reason for remaining in their current positions.
The same study found that 71 percent of millennials would be more likely to leave their jobs in the public sector if their pensions were cut. This has proven to be true. Public-sector workers have left in droves in cities and states that have cut traditional defined-benefit pensions, which guarantee a specified monthly benefit, in favor of 401(k)-style defined-contribution plans, in which benefits are determined by employees’ investment returns.
Since Alaska closed its two statewide defined-benefit pension plans in 2005, for example, it has experienced crisis levels of public-sector worker shortages. Since the switch, the state has seen the number of workers participating in the defined-contribution plans quit at 4.5 to 4.7 times the rate of employees in the defined-benefit plans. It’s gotten so dire that one borough’s governing council encouraged its residents to arm themselves because the Alaska State Troopers cannot recruit enough staff, despite offering sign-on bonuses. The state has incurred significant costs in attempts to recruit workers and is now considering reopening the plans.
Employee turnover is expensive, with the annual costs to U.S. businesses estimated at $1 trillion annually. At the same time, pensions are surprisingly cost-effective because of economies of scale and risk pooling. In fact, traditional pensions provide twice as much benefit as defined-contribution plans at the same cost to taxpayers.
We’ve seen growing support and interest in pensions in recent years, so employers offering these highly sought-after benefits should have a leg up with job seekers. But as fewer Americans live in households with access to pensions, it becomes even more critical that employers provide the necessary education around these benefits to maximize their full potential as successful tools for recruitment and retention.
In the under-35 demographic of the public sector, recent data from the MissionSquare Research Institute found that 1 in 5 employees did not know whether they were participating in a defined-benefit or defined-contribution plan. But it’s not just younger generations struggling with financial literacy, despite the increasing anxiety most are experiencing around their ability to enjoy a secure retirement. Across generations, nearly half of Americans do not know what a 401(k) is.
Workers are seeking out roles that provide pensions and are staying in their roles because of them, but the lack of understanding around retirement planning means that employers risk losing talent if workers don’t understand the full value of their compensation and benefits packages. There needs to be a concerted effort to rethink how to communicate about these resources and provide employees with the education needed to plan for their futures.
It’s clear that benefits matter to workers, playing a key role in recruitment and retention. A recent survey of U.S. workers found that 70 percent of respondents would leave their current role for better benefits, with younger workers expressing the greatest willingness to jump ship. But to maximize the impact of offering a benefit as highly competitive as a pension, employers need to rethink how to effectively communicate with and educate workers.
Hank Kim is executive director and counsel for the National Conference on Public Employee Retirement Systems.
Governing’s opinion columns reflect the views of their authors and not necessarily those of Governing’s editors or management.
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