The trade-off between pension costs and salary expenditures in the public sector

Abstract

We examine pension-cost crowd out of salary expenditures in the public sector using a 15-year data panel of state teacher pension plans spanning the Great Recession. While there is no evidence of salary crowd out prior to the Great Recession, there is a shift in the post-recession years such that a 1% (of salaries) increase in the annual required pension contribution corresponds to a decrease in total teacher salary expenditures of 0.24%. The effect operates through changes to the size of the teaching workforce, not changes to teacher wages. An explanation for the effect heterogeneity pre- and post-recession is that public employers are less able to shield the workforce from pension costs during times of fiscal stress. This problem is exacerbated because unlike other benefit costs, such as for health care, pension costs are countercyclical.

The actuarial sources of the rise in unfunded liabilities in America's defined benefit plans in the 21st century

“…For schools, the share of per pupil expenditures going to fund teacher retirement benefits has nearly tripled since 2004 and now accounts for over 11 percent of per pupil expenditures (Costrell, 2022), and have traded off with raises for teachers and other education expenditures (Aldeman, 2016;McGee, 2016;Melnicoe et al, 2019;Moody and Randazzo, 2020). After the Great Recession, teacher pension expenditures were associated with decreased salary expenditures, operating through a reduction in the teacher workforce (Kim et al, 2020). While rising pension contributions are not associated with increases in revenue, they correspond with downsizing public employee workforces (Anzia, 2020).…”

“…Yet, state DB pension plans had accrued more than $1.37 trillion worth of unfunded liabilities (UALs) at the end of 2020, more than any other point in American history (Randazzo and Moody, 2022). 2 UALs, and the amortization payments to reduce them, eat scarce dollars in state and local budgets, leaving fewer resources available to expand or maintain the size of the workforce, raise salaries, and meet other spending priorities (Aldeman, 2016;Nation, 2018;Anzia, 2020;Kim et al, 2020;Aaron et al, 2022). State and local government employers paid an historic $150.3 billion in contributions to their DB plans in fiscal year 2020 to cover growing costs with the majority going to UAL amortization payments (Randazzo and Moody, 2022).…”