Why Hybrid Government Retirement Plans that Mix a 401(k) with a Smaller Pension are Good News

A recent Wall Street Journal article observed that U.S. state governments are shifting to “hybrid” retirements, plans that mix a 401(k) like account with a defined benefit plan. 1  Advocates support these plans because they require public employees to shoulder a greater burden in funding and planning their retirements.  But there is another reason to support these hybrid plans:  to counter the unnatural longevity of public sector careers.

An oft-heard criticism of government administration in the U.S. is that too many people stay in government jobs for too long, causing workers to become stale and lose perspective, and impeding advancement for top performers trying to work their way up the ranks.  Large pensions may be one of the roots of the cause.  Workers who long ago gave up hope for further advancement or lost job satisfaction associated with serving the community stay in jobs despite dissatisfaction just to wait for their pension rights to vest.

Moreover, indirect effects of public sector pensions may also impede some brave enough to forgo prospective retirement benefits by leaving government service in mid-career.  Because the economic incentive is to stay, those who wish to venture out may find a dearth of former public employees in parts of the private sector they want to transition to because nobody else has tried to leave, making it hard to network to start a new private sector career.

This is not to say that government retirement benefits should be axed.  Secure retirements are often one of the benefits used to attract quality workers to government jobs when political constraints make it hard to offer salaries competitive with private sector peers.  Moreover, for some public functions where the physical demands of the job protect public safety—like law enforcement and firefighters—it makes sense to allow some kind of early retirement so those who do not enter the management ranks or acclimate to other desk functions can start second careers.

Pensions can and should be part of the compensation offered to address these policies.  But programs that create too much of an incentive to keep workers with the government through retirement age should be scrutinized.  Hybrid retirement programs that include a portable retirement savings account that employees can take with them when they choose to leave public service are a step in the right direction.

  1. “States Shift to Hybrid Pensions, Wall Street Journal, July 10-11, 2010, B1 & B4. []

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