The Hidden Costs of State Workers’ Early Retirement

Governor Scott Walker of Wisconsin could not have foreseen how his Budget Reform Bill may backfire and contribute to larger pension liabilities. A structural issue that causes increased pension liabilities and deficits for states is early retirement of state and local employees. The Wall Street Journal article published today, “Public Employees Rush to Retire,” plays it off as government savings and only a loss of expertise in state employees. This is not the case.

A significant reform of Gov. Walker’s budget bill was an increase in employee contribution toward their pension and benefits. The notable increase in state employees applying for retirement in Wisconsin negates a primary cost-saving measure of the bill. From “Public Employees Rush to Retire”:

3,362 people have applied to retire this year, a 73% jump from last year. And 10,975 people since the beginning of the year have taken the first step toward retirement—flooding the Wisconsin Department of Employee Trust Funds with requests for estimates of their potential benefits. That’s up 134%.

According to a Pew study, “The Trillion Dollar Gap,” states normally are ill prepared for this kind of increase in retirement and have not invested sufficient funds to pay for the unexpected pension obligations.

High levels of early retirement like this counteract the benefits presumed by The Wall Street Journal — that many of the employees will not be replaced. Widespread retirement will ensure that new employees will be hired. Early retirement disrupts the states actuarial assumptions of pension liabilities, adding years of retirement benefits for each individual retiree. Consider this account from the WSJ article,

In California, Guy Harris recently retired at 50 years old because he feared he would otherwise lose benefits he says he has counted on since joining the state transportation department 27 years ago as a civil engineer.

“It wouldn’t surprise me if they change the rules and say you can’t retire before 55,” he says. “I didn’t want to get stuck.” He was earning about $9,000 per month and will collect about a third of that as a retiree. Plus, he has been hired back as a consultant, and is working on his own walnut farm.

This is one of the worst scenarios for states. Not only is this state employee retiring at 50 with years and years of pension and benefit payments, he was hired back by the state as a consultant. This cannot be viewed as a savings measure when the state is paying an employee twice.

This short-sighted view of public finance is partly the cause of state pension crises. Early retirement, whether as an incentive from the government or an individual decision, increases expenses. State employees looking to retire early receive similar payments from their state pensions as they did while working. In most situations the employee is replaced, albeit by a less experienced, lower wage employee. However, that inexperienced and relatively inexpensive employee will turn into an experienced highly paid employee, simply because of seniority and tenure. This leaves the states on the hook for the pension of the retiree, the new employee’s salary and benefits, and the state must start saving for the new employee’s pension. With the increase in life expectancy, many of these early retirees will receive benefits and pension payments for longer periods of times than expected.