Baby Boomer Exodus
More than a decade ago, analysts were predicting the next big challenge for state governments: The mass retirement of baby boomers. Then the Great Recession hit and those same baby boomers stayed put, delaying retirement until more prosperous times returned. Now that the economy is on the path to recovery, baby boomers are resuming their retirement plans.
“Nearly all states have 30 percent or more of their employees eligible to retire within the next five years,” said Leslie Scott, executive director of the National Association of State Personnel Executives, a CSG affiliate organization.
According to Scott, baby boomers are finally starting to retire—not only because the economy improved, but also because of changes states have implemented or may implement in their retirement systems.
The National Association of State Retirement Administrators reports that, while states have continually tinkered with their public retirement programs over the years, reforms to public pension plan design and financing really ramped up in the years after the recession.
Those reforms took many forms, but common components included requiring employees to contribute more money toward retirement and/or decreasing benefits. For example, employees in more than 40 plans in 36 states were affected by increases to member contribution rates, most of which were permanent.
Higher costs and fewer benefits provide a significant impetus for baby boomers to go ahead and retire—and that’s just what is happening.
This mass exodus creates a number of challenges for states, including the fiscal impact of so many employees accessing benefits as well as concerns from a human resources standpoint.
“There is a huge concern regarding loss of institutional knowledge and a general lack of skill sets needed,” said Scott. “During the recession, middle management was one of the areas targeted for layoffs. Therefore, there are fewer seasoned managers to take higher-level management positions being vacated by baby boomer retirees. In addition, training was reduced drastically during the recession, which also is a reason some employees aren’t prepared to take on roles vacated by baby boomers.”
In addition, Scott said turnover remains high for employees who have worked in state government for five years or less. “This is due to several things including a generation that doesn’t expect to work for one employer of the course of their career. In addition, compensation—particularly cash—is simply not competitive with the market.”
In New York, state leaders saw this trend coming and they’ve taken steps to make sure the transition is less painful.
“We have anticipated these retirements for a long time and planned for them in the retirement system,” said Tania Lopez, deputy press secretary for New York state Comptroller Thomas P. DiNapoli.
The New York State and Local Retirement System has more than 1 million members, retirees and beneficiaries, and more than 3,000 employers, making it one of the largest public retirement systems in the country. The comptroller is responsible for managing the retirement system’s 346 different benefit programs, which taken together comprise one of the largest institutional investors in the world, valued at more than $176 billion as of March 31, 2014.
In New York, maintaining good data and regular examination of those data is key to the planning process.
“The comptroller's staff regularly reviews the number and types of employees who may be eligible to retire for succession planning purposes,” said Lopez. “For retirement services, our actuary tracks and factors in the age and service of our retirement system members in our calculations. We cannot predict when people will retire, but we know how old they are and how much service credit they have.”
Just keeping good data isn’t enough—it has to be used to make fiscal decisions that are forward-thinking. “The demographics of our members are factored into our calculations of how much money is needed for the pension fund on an annual basis. We factor in member and retiree longevity using the latest measurements and monitor the number of members who leave and enter the workforce,” said Lopez.
Keeping newly retired public employees secure and happy is not just a good strategy for recruiting qualified employees; it’s also an economic development strategy.
“Because public employees can rely on the stability of a defined benefit pension, 78 percent of our public-sector retirees remain in New York, contributing to our local economies,” said Lopez.
In 2015, retirees of the New York State and Local Retirement System were responsible for $11.7 billion in economic activity in New York state. “Retirees spend a larger than average share of their income on industries that benefit local businesses and they are responsible for an estimated 65,850 jobs as a result of this spending, outside of New York City,” said Lopez.