How police and fire pensions factor into public finance
Generous retirement benefits received by public sector police and firefighters don’t have much impact on the overall cost of local government.
That’s the finding of a new report by the Center for Retirement Research at Boston College. The findings run counter to the popular belief that public safety retirement benefits are a significant drag on government finances.
“Changing police and fire retirement benefits is at most going to get you a 1% reduction in expenditures,”said Jean-Pierre Aubry, who co-authored the report with fellow Boston College researcher Kevin Wandrei.
Their analysis found that public safety workers account for only 17% of total local government compensation costs while the remaining 83% paid for teachers and other public sector workers in healthcare, criminal justice, penal, transit, social services and public utilities.
“Most of your local taxes go for school districts and teachers,” Aubry said. “Even though police and fire get more generous benefits because they can retire earlier, they don’t have a huge impact on the local tax burden.”
Public safety retirement costs are most significant at the city and county levels; they average 4.9% of aggregate spending for cities and 1.9% for counties.
Given that public safety retirement benefits are generally a small expenditure item, plan design considerations — rather than cost concerns — should drive any reforms, the authors suggested.
Aubry said state and local governments should consider raising the retirement age for police and firefighters.
A review of 2016 plan documents by the authors found that the replacement rate — the annual retirement benefit as a percentage of the pre-retirement salary — for newly hired public safety employees is about 25% greater than for teachers and other government employees. Among the reasons: public safety employees are less likely to be covered by Social Security.
In addition, there is some evidence that raising the mandatory retirement age has worked.
A number of local governments hoping to retain experienced employees have used a Deferred Retirement Option Plan (DROP), which allows employees to claim pensions while continuing to work. A 2017 study by the Center for Retirement Research found over 90% of Philadelphia employees enrolled in the program, with public safety employees working about five years longer compared to two years for other city employees.
In addition, the U.S. Army has raised its maximum enlistment age from 34 to 39 and its mandatory retirement age for active duty soldiers from 55 to 62.
“There may be room to revisit what is normal retirement age for public safety,” said Aubry.