Data and Research March 16, 2023

Government Employees Express Fear of Outliving Retirement Income

Personal debt, possible cuts to Social Security and rising inflation are concerns for state and local government employees when saving for retirement.

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While many government workers say their jobs’ retirement benefits are what attracted them to the position in the first place, a majority of these workers are also not confident that they are on the right track to financial security in retirement, according to new research published by MissionSquare Research Institute.

MissionSquare’s survey of 1,003 state and local government employees between October and November 2022 found that only 28% of that group are confident they will be able to retire when they want to, and only 23% are confident they will not outlive their savings.

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At the same time, 86% of the survey respondents cited retirement benefits as either major or minor factors that attracted them to their current public sector job in the first place. Factors like job security and personal satisfaction also ranked highly.

Barriers to Saving for Retirement

Rivka Liss-Levinson, one of the authors of the report and a senior research manager at MissionSquare, says rising inflation and concerns about personal debt are driving a lot of the financial anxiety that public employees are experiencing.

According to the report, one in three respondents said they have a hard time paying their monthly bills on time and in full. In addition, 87% of respondents said they have one or more types of debt, and 77% of these employees said their level of debt prevents them from saving more for retirement.

“We saw very low levels of financial security … and that’s something that really can have an impact on state and local government workers, not just in terms of their financial security, but [in] how they’re able to perform at work,” Liss-Levinson says. “If they’re focused on their finances and worrying whether or not they can pay their car loan, it’s going to be a lot harder for them to provide important services.”

The most common types of debt for government employees, according to the survey, include credit card debt (61%), mortgage debt (46%), car loans (45%), student loans (26%) and medical expenses (22%).

State and local government workers reported saving for many other purposes besides retirement. The majority (58%) said they are saving in an emergency fund, whereas others reported saving for a vacation, travel or home improvements.

Joshua Franzel, managing director at MissionSquare, says these kinds of short-term goals often interfere with how much employees will save in the long-term.

MissionSquare also found that more than half (56%) of the government employees surveyed reported they are participating in a defined benefit plan through their employer, and slightly fewer (48%) are participating in a defined contribution plan. Among those participating in a defined benefit plan, 76% are fully vested, based upon their years of employment.

But outside of workers’ employer retirement plans, the potential for cuts to Social Security are a major concern, as 63% of respondents said they plan to use Social Security benefits as income in retirement.

Meanwhile, more than half of the respondents said they are worried about the government making significant cuts to Social Security before they retire. The Congressional Budget Office reported in December 2022 that it predicts trust funds used to pay for Social Security will be depleted by 2033, resulting in a 23% cut in planned benefit payments in 2034.

But Franzel also points out that there is a sizable minority of public sector workers who do not participate in Social Security. The survey found that 35% of respondents are planning to use savings from an individual IRA to supplement income in retirement.

Struggle to Retain Workers

Despite relatively positive levels of morale, 59% of respondents said they are considering leaving their jobs voluntarily for either or both of the following reasons: to change jobs, to retire or to leave the workforce entirely for the foreseeable future.

Common demographic characteristics of those considering changing jobs include people less than 40 years old, unmarried, earning a household income of less than $50,000 per year, college-educated, of Hispanic descent, not financially secure and people struggling with debt.

Liss-Levinson notes that many employees are feeling burned out and stressed due to colleagues leaving their jobs during the pandemic. These employees are often forced to take on an additional workload at their jobs, which may lower their morale and motivate them to leave.

When asked what their employers should do to help with employee retention, respondents were most likely to recommend improving salaries (74%) and increasing bonuses (54%).

Liss-Levinson says she is particularly struck by the finding that 45% of respondents said showing more appreciation and recognition for employees and they work they do was among the top recommendations for employers to help retain more people.

“[This is] a way that employers can help [with retention] without some of the red tape that you might have to go through to change compensation structures,” Liss-Levinson says.

This MissionSquare research was conducted in a national online survey in conjunction with Greenwald Research. The final data was weighted by gender, age, income and industry type to reflect the distribution of the state and local government workforce as found in the U.S. Census Bureau’s Current Population Survey and the U.S. Census of Governments.

Benefits March 16, 2023

DB Summit: Alternative DB Plan Designs

Experts explained the advantages of cash balance DB plans and variable plans that offer a set payday without losing the advantages of market growth.

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There may be renewed interest from companies in starting defined benefit plans and even opening up frozen plans that are not accepting new participants, according to panelists at the PLANSPONSOR DB Summit held last week.

Steve Mendelsohn, pension director at Zenith American Solutions Inc., moderated the Alternative DB Plan Designs session, in which experts discussed both cash balance plans and variable benefit plans.

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A DB cash balance plan is an account paid into by the employer, yet operating similarly to a 401(k) plan for participants; it also gives retiring or terminated employees the option of a lifetime income annuity or lump-sum payout. Thanks to the return of regulation that allows for plan payouts to align with employee tenure, companies may be interested in starting DB cash balance plans again, said John Lowell, a partner and consulting actuary at October Three Consulting LLC.

Recently, many organizations were either freezing or skipping the DB plan option because “they couldn’t stand the volatility” that went into managing them due to market fluctuations, Lowell explained on the webinar. They also were struggling with the advantages of it, because regulation did not allow them to vary the retirement income check based on tenure.

“It’s very technical, but essentially [regulators] said almost any cash balance design you have with a variable interest crediting rate has to have back-pay credits,” Lowell said. “That means that if you give a 5% pay credit to a person who’s 20 years old, you have to give a 5% pay credit to a person who’s 60 years old. You can’t have any variability.”

Past cash balance plans tended to have graded pay credits. To get back to that more attractive option, Lowell said, industry players were told they needed a Congressional fix to allow for graded pay credits.

Thank You, Congress

That fix came with the passage of the SECURE 2.0 of 2022 in December 2022. It allowed plan sponsors to assume an interest credit that is a “reasonable” rate of return, provided it does not exceed 6%.

“What that does is now say that participants can get a market rate of return on a basket of investments that they can invest in, in just the regular world or in their defined contribution plan,” Lowell said.

As a plan sponsor, if you know what the rates of return are going to be, you can hedge them by making the same or similar investments, he explained. This is key, because a sponsor’s assets and liabilities can track each other, essentially de-risking the plan and providing costs that are at least as stable and predictable as a 401(k) plan or a profit-sharing plan.

“There’s really no difference from an employer’s standpoint in terms of cash flow perspective,” Lowell said. “But from the employee standpoint, there’s an awful lot you get. … You get your choice of a lump sum in almost all plans, or an annuity at fair prices.”

Variable Benefit Plans

Another trend in the DB space is what moderator Mendelsohn called variable pension plans, which reduce risk to the funding sponsor. These types of plans have “struck a chord with Taft-Hartley” trustees, or multiemployer benefit trusts, he said.

There are two types of variable plans, said Richard Hudson, a consulting actuary at First Actuarial Consulting Inc. In one, the participant’s end-benefit fluctuates depending on market returns.

These type of plans “generally show their benefit in terms of shares on the plan,” Hudson said. “A benefit formula might be $100 per month per years of service for one person to pay whatever it might be; you take that benefit, and you convert it to a number of shares.”

Those share values are going to increase and decrease each year with the investment performance trust fund, Hudson explained. One concern is that if a participant retires and there is a market downturn, they might lose 20% of their benefit. To offset that, some plans set up a reserve to protect retirees from a downturn. Either way, this market-tied defined benefit may be a challenge for sponsors to manage due to market fluctuation.

Scenario Two

In the second variable-plan scenario, the employee will get a fixed contribution—what changes are the future accruals within the trust, Hudson said.

“The general idea of this plan is to provide the employer with a fixed contribution,” he explained. This plan is “not subject to volatility and ensures that the contribution is sufficient by adjusting for future benefits. It then allocates those dollars between newer pools and underfunding in the plan and paying that off.”

In a static pension plan, Hudson said, it is hard to determine what the next 10 or 20 years are going to be. With variable benefits, the result is to reverse that setup to make the contributions stable, while the benefit formulas adjust over time.

That setup “will absorb the impact of gains and losses,” Hudson said. “If the plan becomes underfunded, you have more contribution dollars that are needed to shore up the fund, so less money is available for benefits, and it will decrease the accrual. If the plan becomes overfunded, you have more money than you need, and [you]’re going to amortize that money back into new benefits by increasing the accrual.”

There are drawbacks to the plan, according to Hudson. That includes the plan needing to be designed correctly without knowing the future of the investment market, as well as some gray areas around how the IRS values variable benefit plans.

In the end, sponsors can go back and forth while weighing benefits of the two plan designs, Hudson said, “but ultimately, the deciding factor is always going to be what can we communicate to our participants. And what are they going to understand. That becomes the deciding factor as to which plan you’re going to deal with long term.”

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