What Does the Literature Tell Us About the Possible Effect of Changing Retirement Benefits on Public Employee Effectiveness?

Abstract

Proposals exist to change public employees’ retirement benefits from defined benefit (DB) pensions. This could increase employee turnover and raise initial compensation. More experienced employees are replaced with less experienced ones, reducing effectiveness. But, new hires’ effectiveness could increase with higher compensation. We simulate the net impact of these offsetting effects and find that there is a 60% to 70% chance that effectiveness will fall relative to the effectiveness that would have prevailed without benefit changes. There could be substantial transition costs, which could increase to 0.8% of payroll in the third decade after the switch for a typical DB pension.

Keywords: public employees, pension design, cash balance plans

JEL Classification: H79, J24, J26, J33, J38