Comparing the Effects of Current Pay and Defined Benefit Pensions on Employee Retention: Working Paper 2018-06
This working paper compares how cuts to pension benefits and reductions in current pay caused by higher employee contributions affect retention by examining changes in resignation rates, retirement rates, and job tenure.
Federal, state, and local governments continue to consider reducing the cost of their defined benefit pensions by decreasing annuity payments or having employees contribute a larger portion of their salaries toward them, thus reducing those workers’ current pay. Such reductions to compensation can decrease the human capital of a workforce through lower employee retention. Using data that span more than 30 years and reflect substantial policy changes to federal workers’ salary schedules and pension structure, we estimate that the average elasticity of job tenure with respect to the employer’s cost is 1.5 for changes in current pay and 0.8 for changes in pension benefits. The magnitude of the estimated effects is different because cuts to the defined benefit pension cause many workers to delay retirement and also lead to fewer resignations than do similar cuts in current pay.