Do Smaller Public Employer Pensions Spur More Saving?

Laura Quinby and Geoffrey Sanzenbacher

No 76, State and Local Pension Plans Briefs from Center for Retirement Research

Abstract: A simple lifecycle model predicts that employees should react to variation in their expected pension income by adjusting their supplemental retirement saving. Whether this prediction is accurate may turn out to be very important for state and local workers. While a common narrative holds that state and local workers spend a full career in government and retire with substantial defined benefit pensions, in practice, their defined benefit wealth varies widely across jurisdictions, and a subset of plans are so poorly funded that they may not be able to pay full benefits. In addition, about 25 percent of state and local workers are not covered by Social Security in their current job. To see whether public workers are likely to augment their pensions with outside savings, this brief, based on a recent study, explores the relationship between participation in a supplemental defined contribution plan and three factors that could impact the need to save: low wealth accumulation in a defined benefit plan, low plan funded levels, and lack of Social Security coverage. The discussion proceeds as follows. The first section describes what we know about the interaction between saving in defined benefit pensions (employer plans and Social Security) and supplemental saving. The second section discusses the data used to examine how supplemental saving relates to public employer defined benefit plans. The third section describes the methodology that relates supplemental savings to an employeeÕs pension plan savings, the planÕs funded ratio, and Social Security coverage. The fourth section presents the results, which show that workers modestly increase their participation in a defined contribution plan in response to lower required contributions to their pension, but not to a low pension funded ratio or a lack of Social Security coverage. The final section concludes that if states and localities hope their workers will make up for reduced pension income through supplemental savings, that hope may be ill-founded.

Pages: 8 pages
Date: 2021-03
New Economics Papers: this item is included in nep-age, nep-cwa and nep-ias
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