mead cohen berger shevtsova garfinkle michta grygiel blankenhorn
Pension Reform
Defined-Benefit Public Pensions: Unwise and Unfair

America’s multiplying state and city public pension problems have given rise to a cottage industry in which researchers scour records for examples of retirees who are raking in six-figure salaries. Public employee unions and their defenders typically respond to these reports by pointing out that these aberrations don’t tell the real story, and that the majority of public sector workers retire on modest pensions of $19,000 per year.

AEI’s Andrew G. Biggs notes in the WSJ that this statistic is often true, but also misleading. While average pension payouts are low, workers who have spent their entire careers in the public sector get much, much larger payouts. Biggs found that the average pension for these workers was almost twice as large, at $36,000—and that’s before Social Security, health care, and other benefits are added in. The amounts appear particularly high when compared with the wages of active employees:

Ideally, we could compare the incomes of retired public employees to those of private retirees, but government data do a poor job of tracking the income that private retirees receive from IRA and 401(k) plans. However, we can compare government retirees’ incomes, including Social Security, with those of workers in their state. This is a more conservative approach, since retirees need a significantly lower income to maintain their standard of living.

Data from the Bureau of Labor Statistics’ Occupational Employment Statistics survey show that the average retired state-government employee has an income higher than 72% of full-time workers in his state. Generous public pensions ignore political bounds. A retired full-career California state worker takes home more than 87% of full-time workers’ incomes, but the same is true for Alabama and Texas. Oregon pays its retirees more than is earned by 90% of employees in that state.

But not all public workers are getting a good deal:

This isn’t to say that every public employee receives a generous pension. Due to vesting provisions and a “back-loaded” benefit formula, long-term employees receive generous benefits but government workers with shorter careers receive far less. Nearly half of government employees leave without any right to future pension benefits. Shorter-term employees would do better with a 401(k) or cash-balance plan, but public employee unions—dominated by long-career employees—oppose most pension reforms.

This points to a key problem with defined-benefit pension plans. Not only are these massive pensions unfair to the taxpayers; they are deeply unfair to other public-sector workers too. By backloading the plans, public employers are essentially rewarding lifetime employees at the expense of shorter-term workers. Nor are these plans typically transferrable to other employers; employees who switch jobs may be left with little to show for years of contributions. Under the current setup, these plans function more as a loyalty reward program for public workers than a simple retirement savings program. Asking taxpayers and short-term employees to pay for this is unfair.

With defined-contribution plans, on the other hand, what you get out of the system is directly linked to what you put in, rather than how long you stay at one job. Workers also have more flexibility to take their plans with them when they change jobs. Not only are these plans a smarter move from a fiscal stability perspective; they are fairer to workers as well.

Features Icon
show comments
  • free_agent

    I think comparing the income of state employee retirees to the income of *all* workers in a state is not particularly fair, as the average state employee has a higher-skill job (and hence higher pay) than the average worker in the state. How do state employee retirees compare to the *current* state employees? That corrects for that factor.

    As for back-loading pensions tying the worker to the job, that sort of arrangement is common in unionized industries, because it also ties the worker to the union — the worker loses the ability to advance other than through the collective advancement of all union members.

    • Andrew Allison

      Higher than 72% of full time workers (“Data from the Bureau of Labor Statistics’ Occupational Employment
      Statistics survey show that the average retired state-government
      employee has an income higher than 72% of full-time workers in his
      state.”). Surely you jest.

  • Jane the Actuary

    Sorry, but you misunderstand the difference between “Defined Benefit” and “Defined Contribution.” The traditional final average pay x years of service x multiplier is just one type of DB plan. The Cash Balance plan actually, for all the criticism, was actually an attempt to remedy this, and combine the level accruals of a DC plan with the protections of a DB plan (investment earnings replaced by an investment credit, normal payment form of life annuities). There have been increasing efforts at developing other sorts of “hybrids” to provide some of the protection against investment and longevity risk outside a traditional DB plan, such as Harkin’s “USA Retirement Fund” concept, as a sort of “third-party” plan. (See ) A pure DC environment is emphatically *not* the way to go.

© The American Interest LLC 2005-2016 About Us Masthead Submissions Advertise Customer Service