Opinion: What happens when worker benefits are cut? Some suggest that workers offset benefit loss with more saving elsewhere

The economist’s simple life cycle model predicts that workers will respond to a $1 decrease in their defined benefit savings by increasing their supplemental savings by $1. Whether this prediction holds in practice may turn out to be very important for state and local workers.

To see whether public workers take advantage of these options, my colleagues estimated the relationship between participation in a supplemental defined-contribution plan, on the one hand, and low wealth accumulation in a defined-benefit plan, low plan funded levels, or lack of Social Security coverage, on the other. To do this analysis, they merged individual-level data in the Survey of Income and Program Participation with plan-level data from the Public Plans Database .

The bottom line is that people do not always respond as theory would suggest. State and local workers may simply not be aware of how much saving is taking place through their defined benefit pension; they may not appreciate the extent to which their plan is adequately funded; and they may not understand the implications of not being covered by Social Security.

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