Defined benefit (DB) pension plans are a valuable benefit for employees—offering the option of guaranteed retirement income that is lacking in most defined contribution (DC) plans.
Some private-sector employees have been envious of the pension benefits provided to public-sector employees. Over the years some outsiders have even argued that public pensions are too generous, perhaps without understanding that many public employees are required to put a significant percentage of their own pay into the plans. And there has been misunderstanding about the amount of support public pensions get from taxpayers.
A report from the National Institute on Retirement Security (NIRS) that aimed to examine Americans’ views on public retirement plans says state and local pensions are funded from three sources: employer contributions, employee contributions and investment earnings. Between 1993 and 2018, about 25% of public pension fund receipts came from employer contributions, 11% from employee contributions, and about 64% from investment earnings. “This means that earnings on investments historically have made up the bulk of pension fund receipts, even during two market downturns, and taxpayers are funding only a portion of these benefits,” the NIRS says.
The NIRS also found more widespread support for public pensions than in the past. “The COVID-19 pandemic has shined a light on the critical role that qualified, experienced state and local workers play in our lives,” says Dan Doonan, NIRS executive director and report co-author. “From health care workers to first responders to teachers, these employees have worked tirelessly and taken immense risks this past year.”
Nearly three-fourths (72%) of respondents to an NIRS survey agree that state and local employees should receive pensions because they help finance part of the cost by contributing money from each paycheck. Sixty-nine percent say public school teachers deserve a pension to compensate for their lower pay. Similarly, Americans say high-risk jobs are another reason that public employees should receive a pension, with 76% in agreement.
In addition, more than three-fourths (77%) of Americans say all workers, not just state and local employees, should have access to a pension.
The 2008 global market crash reduced public pension fund asset values and, since then, nearly every state has enacted reforms to its pension plans to ensure their long-term sustainability, including by implementing benefit reductions and increased employee contributions.
Meanwhile, a study report from the Equable Institute suggests the majority of recently hired public employees are not provided with an adequate path to retirement income security. “While the value of pension benefits can be quite high for full-career workers (those who work longer than 20 years), the reality is that very few people will actually get these benefits, leaving many workers unprepared for their future financial demands,” the report says.
Only 11 out of all 335 state retirement plans offered to new members are serving what Equable calls “short-term workers”—those who will leave before 10 years of service—well. This includes pension, defined contribution, guaranteed return and hybrid plans. Equable says individuals working 10 years or fewer in the same plan make up about half of the public sector workforce at any given time.
In addition, Equable found only 24 out of 220 state pension plans are providing sufficient benefits to what it calls “medium-term workers”—those who serve between 10 and 20 years.
The study found that “full-career workers” are served well by all plan types, including pension, DC, guaranteed return and hybrid plans. However, Equable found that a DC plan and a hybrid plan serve all members well.
The study found that some of the best-performing plans are public DC plans for full-career workers. “A key feature of these plans is that they have relatively high contribution rates, such as South Carolina’s 14% of total payroll contributions for state, local and public school workers,” the report says.
On the other hand, guaranteed return and hybrid plans that combine elements of guarantees and individual accounts perform worse on average than straightforward pensions and DC plans, the study suggests. “They provide trade-offs for members who want to balance risk and agency, so they may still be optimal for certain workers whose risk tolerance is willing to accept slightly lower valued benefits,” the report says.