Report: Pension reform is hurting employee retention

A newly released National Institute on Retirement Security report looks past the $3 billion that the 2011 Raimondo-era pension overhaul has saved taxpayers and instead focuses on the impact on state and municipal employee retention.

As state lawmakers weigh what, if anything, they can do to ameliorate the “unintended consequences” of the 2011 cost-saving moves, the report’s central finding is that there has been a higher employee turnover rate.

“The impact varies across professions, but the overall trend indicates increasing challenges in retaining experienced workers,” the report says. “This trend towards higher turnover contributes to a workforce with less experience, potentially affecting productivity and the quality of public services.”

While this matters in all public employment arenas, the report notes that new police officers and firefighters are required “both to attend an academy and get on-the-job experience before they are fully trained to protect public safety.”

Leaning toward more generous retirement benefits for all categories of workers, the report recommends “the incentives should push strongly toward keeping workers who have received those critical early years of training and experience.”

Reaction to the report is growing

The recently released report is already circulating fast among the state’s current public employees, as well as state retirees hoping legislators will look sympathetically on their plight as they weigh what they can, or should, do in the wake of the cost estimates produced by a state-appointed pension advisory group.

Some of those estimates were eyepopping.

Patrick Crowley, secretary-treasurer of the Rhode Island AFL-CIO, said Friday that the report shows one of the unintended consequences of pension reform was making it harder for the government, including school departments, to recruit and retain workers.

“If we want to attract a diverse and skilled workforce now and in the future, it is in the best interest of the state to make adjustments to the retirement plan for active employees,” he said.

Tracing what has happened since the state moved from defined-benefit pensions paying up to 80% of an employee’s highest three-year salary average at retirement to a less generous “hybrid” plan with a 401(k)-style component, the NIRS report cites this 2022 finding:

“Only 29 of 100 new state employees would reach 25 years of service.”

“In contrast,” the report says, “the 2010 actuarial study would have projected 47 to still be employed. This reduction in the number of experienced state employees likely has an unavoidable impact on the quality of public services.”

The result: “Employee turnover has been consistently higher in the most recent actuarial experience report for nearly every age grouping ... and for each group of workers, including state employees, general employees, police officers and firefighters, and teachers.”

The 20-page NIRS report says that while “many factors” play into the decision of whether a worker stays in their job or leaves for other opportunities, “retirement plan offerings are generally considered an effective worker retention

“This trend towards higher turnover contributes to a workforce with less experience, potentially affecting productivity and the quality of public services.”

tool that incentivizes long careers at an organization.”

Long careers, the report says, are particularly valuable in the public sector because there are many professions, like the public safety jobs of policing or firefighting, that require “large sunk costs to provide specialized training for new employees.” In other professions, like teaching, a new worker gains “markedly in effectiveness” over time, the report explains.

“It is important to keep note that other issues, like the availability and size of pay raises, employer-initiated terminations during recessions, and the impact of the COVID-19 pandemic likely also are key factors,” the report says.

The report suggests the transition from a defined-benefit plan to a hybrid plan, where the guaranteed benefits are smaller, “is likely causing demonstrable changes in employee attrition.”

Teachers were among the exceptions, which the authors of the study interpreted this way:

“Teaching still remains a career choice for many, even if the hybrid plan is somewhat weakening incentives to stay.”