Pension cuts getting steeper for state and local governments: A Foolish Take The reduction of pension benefits for newly hired employees could make it difficult to attract good workers to the public sector.

Dan Caplinger | The Motley Fool

Show Caption Hide Caption Kentucky teachers protest pension bill Hundreds of Kentucky teachers called in sick on Friday to protest last-minute changes to their pension system, forcing nearly two dozen districts to close while educators rallied outside of the governor's office to demand he not sign the bill. (March 30)

In the past, workers generally chose between two paths. Working in the private sector often meant getting a better salary but less-attractive fringe benefits. By contrast, public sector employees typically got lower base pay, but the promise of valuable benefits such as traditional pensions made the sacrifice worth it for many workers.

Now, that has changed. Financial pressure on state and local governments has forced them to cut benefits for public sector workers. In particular, according to Boston College's Center for Retirement Research, newly hired employees saw dramatic cuts in their public pension plan benefits in several areas from the mid-2000s to the mid-2010s.

Rising retirement and benefit-vesting ages, longer periods for measuring salaries for pension calculation purposes, lower percentages of pay and smaller adjustments for cost of living increases all are making public-sector pension benefits smaller. Thus far, cuts have been much rarer among current employees of state and local governments, with employers choosing to make only prospective changes for new hires.

It's not clear whether reduced public pension benefits by themselves will permanently hurt the ability of state and local governments to find highly qualified employees. The fact that current employees have largely escaped cuts has been a positive for retention. Nevertheless, with pension cuts often coming at the same time as wage and hiring freezes and less-extensive health insurance coverage, the days of counting on a government job to provide superb benefits seem to be over.

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