Do Benefit Cuts Encourage Public Employees to Leave?

A number of state and local pension systems have persistently low levels of funding. These poorly funded plans in places like Kentucky, Illinois, and New Jersey may eventually reduce benefits not only for new hires, but also for current employe es. The question is: do cuts to pension benefits encourage a state’s public sector workers to leave for the private sector? This brief, based on a recent paper, evaluates a 2005 reform of the Employees’ Retirement System of Rhode Island (ERSRI) that cut core benefits for state employees and teachers without raising salaries to compensate. It examines whether these benefit cut s for current employees encouraged them to separate from the government, investigates whether teachers (an important and often-studied group) reacted differently to cuts than other workers, and explores the possible consequences for public services. The discussion proceeds as follows. The first section outlines Rhode Island’s history of pension reforms and describes the 2005 legislation. The second section introduces the evaluation methodology and quantifies the effect of the 2005 reform on employe e separation. The third section addresses the potential costs of an employee exodus. The final section concludes that benefit cuts encourage government workers to leave their jobs – particularly non-teachers who may have more options in the private se ctor – but that the size of the response is small relative to the budgetary savings from the reform. Nevertheless, government employers should consider the human resource cost of reduced compensation when analyzing potential pension reforms.