Retirement System Characteristics and Compensating Wage Differentials in the Public Sector

This paper presents evidence that a trade-off exists between wages and certain characteristics of retirement systems in the public sector. Cross-section econometric estimates for uniformed municipal employees, based upon data from two national surveys of municipalities, suggest that, other things equal, an increase in the contribution made by uniformed employees to their retirement system leads to a compensating increase in their salaries, while retirement systems with more “generous” characteristics are associated to some extent with lower salaries. The estimates also indicate that the extent of retirement system underfunding is related to employers' and employees' perceptions of the probability that promised retirement benefits will not be fully paid and that these perceptions too are reflected in compensating wage differentials. The author concludes that pension reform legislation in the public sector will be likely to have an impact on public sector wages and, therefore, careful consideration should be given to the design of such legislation.