Lessons for public pensions from Utah's move to pension choice

Abstract

We explore what happened when the state of Utah moved away from its traditional defined benefit pension. In its place, it offered new hires a choice between a conventional defined contribution plan and a hybrid plan option, where the latter has both a guaranteed benefit component and a defined contribution plan where employees bear investment risk. We show that around 60% of new hires failed to make any active choice and, as a result, were automatically defaulted into the hybrid plan. Slightly more than half of those who made an active choice elected the hybrid plan. Post-reform, employees who failed to actively elect a primary retirement plan were also far less likely to enroll in a supplemental retirement account, compared with new hires who actively selected a plan. We also find that employees hired following the reform were more likely to leave public employment, resulting in higher separation rates. This could reflect a reduction in the desirability of public employment under the new pension design and an improving economic climate in the state. Our results imply that public pension reformers must consider employee responses in addition to potential cost savings, when developing and enacting major pension plan changes.

Institutional and individual investors: Saving for old age

“…However, the authors also highlight a high level of passivity among investors, showing-for example-that although automatic enrolment increased participation rates, automatically enrolled individuals did not adjust the saving rates and allocations initially established by their employers. This tendency to go for default options is also documented by Clark et al (2016), who study the 2011 pension reform in the state of Utah (USA). They find that over 60 percent of employees affected by the reform did not choose their pension plan in an active manner, and consequently ended up with the default option.…”

“…They argue in favour of simplicity and understandability. Cobb- Clark et al (2016) provide evidence that having an 'external' person delegated to look after retirement savings is less effective than households having an 'internal' person responsible for the task. Stolper (2017) sheds new light on this matter.…”

Contribution volatility and public pension reform

“…Another alternative of course is for states to shift away from DB plans. This is the most obvious way for employers to shift risk on to employees, though states must also consider the implications for employee retention and recruitment (Clark et al , 2016).…”

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

“…This lowers the asset-to-liability ratio and triggers higher contributions at a time when public 1 Fitzpatrick estimates that senior teachers are willing to give up very little in current salary to increase pension compensation -20 cents per present-value dollar of pension benefitsat least at the margin. Studies by Chingos and West (2015), Clark et al (2016), and Goldhaber and Grout (2016) find that teachers are split in terms of their preferences for definedcontribution (DC) versus DB retirement benefits, with a large fraction of teachers typically opting into each type of plan when given the choice. Glaeser and Ponzetto (2014) develop a political-economy model consistent with there being low incidence of pension costs on public workers.…”