I don’t usually write about labor issues or pensions specifically, but an interview I got with a clerical union representative a few months ago made me think about pensions and vesting. I’ve come to believe that, to improve labor productivity at US public agencies (including transit, but not just), it would be useful to reform pensions, keeping their current levels and defined-benefit nature, but changing them to vest annually. That is, a year of working for a public agency at salary X should entitle a worker to a retirement annuity equal to a fraction of X, depending on age and years of experience (the fraction should be higher at lower age, representing more time the pension fund has had to gain interest).
In contrast, state governments in the US today have a long-term vesting model. I talked to Tim Lasker, president of the local Office and Professional Employees International Union, representing MBTA clerical workers. I intended to ask about salary competitiveness and retention, but Lasker told me that the pension system represents a “golden handcuffs.” People who are on the job for 25 years have fully-vested pensions, but people who leave earlier leave a chunk of money on the table by going. As a result, people with 15 or so years of experience don’t leave.
Jamal Johnson, a labor relations analyst working for the state government of Pennsylvania, said that in Pennsylvania pensions take up to 30 years to fully vest, and take 10 years to even partially vest, so workers who leave earlier get nothing.
The result is that there isn’t much turnover among employees with defined-benefit pensions. This is not a good thing. Lasker told me there is a lot of burnout, and a lot of people who just show up to work but aren’t productive, and are just punching the clock every day until they vest. They’re not lazy, and probably would quit in frustration and leave to a place where they could be more productive if it didn’t come at an enormous cost. Among the people who don’t have defined-benefit pensions, such as assistant secretaries and M.B.A. hires, there is much more turnover – too much, per Lasker, with people typically staying 1-2 years.
In the private sector, the best practice seems to be letting stock options vest after a number of years, as in the tech industry. But this is in an environment with performance bonuses – the idea is that giving workers shares in the company that only vest in a few years will incentivize them to work toward the company’s bottom line. The pensions are defined-contributions, which means the company and employee set aside money for a savings account that the government undertaxes, rather than providing a real pension.
Calls for pension reform in the public sector have tried to look to private-sector models, hence calls on the right (e.g. by Nicole Gelinas) to give public employees tax-deferred defined-contribution pseudo-pensions rather than actual pensions. Unless the point is to surreptitiously cut pension obligations, there is little point in this. The difference between a defined-contribution and a defined-benefit pension is ultimately who bears the risk of the worker living longer than expected. Under defined-contribution, it’s the worker, who then has to save much more money to avoid being penniless at 90. Under defined-benefit, it’s the company, which can average the amount across a large number of employees. In effect, defined-benefit pensions work as free life insurance.
The problem with the defined-benefit model today is purely that it assumes people work for the same agency their entire life, and thus pensions take decades to vest. This might have made sense in the middle of the 20th century, but it doesn’t today. People burn out, at which point it’s mutually beneficial for both sides to have them look for a new job and for the agency to look for a new worker. With burned out employees, the effect of the golden handcuffs on loyalty is not positive: people who are just punching in and out have no reason to be especially loyal to an employer that they hate. And the effect on morale is destructive: Lasker did not tell me this, but I suspect that with so much resentment among middle management, new hires are inducted into a culture in which good work is not valued. Lasker blamed mismanagement, and it is likely that this mismanagement percolates down the food chain.
There’s also limited risk of revolving door with transit agencies. In regulatory agencies, limiting employee exchange with the private sector is desirable, because otherwise workers have an incentive to shirk their duties in exchange for later high-paying jobs at the private companies they’re supposed to regulate. Tax collection agencies, safety agencies (including the FRA), and antitrust regulators are all at risk of regulatory capture. But transit agencies exhibit little such risk, since they do operations in-house. Capital programs are more vulnerable, but there, the people who are most affected by the revolving door are at the very top, and they’re not relying on a union pension. So the biggest risk coming from encouraging turnover at other public agencies is limited when it comes to transit agencies.
With this in mind, it’s useful to come up with a model in which pensions work like defined-contribution pseudo-pensions – that is, a sum of money the employer gives the worker that’s earmarked for a tax-deferred savings account. However, to reduce the aforementioned risk of running out of money in old age, it should be defined-benefit. I’m not aware of an existing model that achieves this, but it doesn’t mean such a scheme is impossible: the numerical parameters of this scheme (retirement age, rate of return, etc.) are already set in union agreements. All that’s required is to break down the pension into fractional amounts, accumulated every year of work, and cut the overall levels slightly so as to account for people who leave before their money is vested.
The big drawback of this plan is that there’s no real political appetite in the United States for any benefit-neutral pension reform. The unions might be interested, but without small cuts to offset people who leave early, a small additional increase in spending is required; the effect on productivity should be more than high enough to justify it, but the current zeitgeist in rich American cities treats pensions as outdated for ideological reasons. These same reformers who, as a rule, are outsiders to the union and think in terms of defined-contribution pensions, aren’t especially interested in making defined-benefit pensions work. If they think in terms of attracting and retaining talent, they think in terms of higher base wages.