About Our Methods
- How State and Local Retirement Plans Work
- How We Grade Plans
- About the Researchers
Efforts to reform the retirement plans provided to state and local government employees are gaining momentum across the country. From 2009 to 2011, 43 states significantly revised their state retirement plans (Snell 2012). Ten states made major structural changes to their plans in 2012 (National Conference of State Legislatures 2013). More recent reforms have passed in such states as Kentucky, Tennessee, and Illinois. These initiatives have been driven primarily by financial concerns. The 2007 financial crisis depleted much of the reserves held by many state and local plans. By their own accounting, plans had set aside enough funds in 2012 to cover only about three-quarters of their future obligations, about a $1 trillion shortfall (Munnell, Aubry, Hurwitz, and Medenica 2013). Outside estimates, based on arguably more realistic actuarial assumptions, put the shortfall much higher (Novy-Marx and Rauh 2011). Absent any reforms this funding gap will likely force state and local governments to increase their payments to pension funds, raising pressure on government budgets and threatening to crowd out other public services or lead to tax hikes. Government contributions to public employee retirement plans have already nearly doubled over the past decade (Johnson, Chingos, and Whitehurst 2013).
The focus on public pensions' financial problems has largely drowned out a broader discussion of how well these plans serve government employees, employers, and taxpayers. For example, the central mission of the public pension system is to provide retirement income to government employees. How well do these plans perform that role, including for those employees who devote less than a full career to a single employer? Are traditional pensions still appropriate for a modern workforce that is growing older and that changes jobs more frequently than in the past? Do state and local plans reward younger employees who may only spend a few years in the plan? Do they encourage work by older employees or penalize their work, encouraging early retirement? Do these plans lock in mid-career employees—who could be more productive elsewhere—by providing lucrative benefits if they remain on the job for a certain number of years but very little if they separate a year or two earlier? In short, does the current system help government employers recruit and retain a productive workforce, or does it impede those efforts?
To spur this broader debate, we conducted a comprehensive evaluation of state and local pension plans across the nation. Our report card grades plans based on how much retirement income they provide to both short- and long-term government employees, whether they enhance the capacity of governments to recruit and retain a productive workforce, and whether they are setting aside enough funds to finance promised benefits. Our scores are based on the Urban Institute's State and Local Employee Pension Plan Database (SLEPP), which provides detailed benefit rules and financial information for state-administered retirement plans covering teachers, police officers and firefighters, and general state and local government employees in all 50 states and the District of Columbia. SLEPP compiles financial data and information on employee contribution rates, vesting requirements, benefit formulas and eligibility rules, early-retirement reductions, cost-of-living adjustments, and actuarial assumptions. Because states frequently change their plans for new hires but exempt incumbent employees, plan rules often vary by hire date. The database collects information for each of these variants, often called plan tiers, so that it represents plan rules for nearly all participants employed in 2014. SLEPP includes 687 plan tiers covering teachers, police officers and firefighters, and general state and local government employees in all 50 states and the District of Columbia. Only state-administered plans are included; plans administered by municipalities are excluded.
Our grades indicate that the traditional pension plans sponsored by most state and local governments generally provide lucrative retirement incomes to long-term employees but offer little retirement security to workers who change employers several times over their career. Traditional plans also tend to encourage older employees to retire early, a problematic feature as the workforce grows older. These plans may complicate government efforts to recruit younger employers and retain older ones. Alternative plan designs, such as cash balance plans and plans that include individual accounts, may better meet the needs of government and modern workers.
How State and Local Retirement Plans Work
There were 19.3 million state and local government workers employed in the U.S. in March 2012, 14.4 million of whom worked full time (Jessie and Tarleton 2014). Nearly three-quarters were employed by local governments, including counties, municipalities, townships, school districts, and special districts. More than half worked in education, and 7 percent worked in police and fire protection. Nearly all are covered by retirement plans that provide cash benefits to retirees. In 2013, 99 percent of full-time state and local government employees had access to employer-sponsored retirement plans, and 94 percent participated (Bureau of Labor Statistics 2013). In the private sector, by contrast, only 74 percent of full-time employees had access to a retirement plan in the workplace, and only 59 percent participated. However, an estimated 28 percent of state and local government employees are not covered by Social Security (Nuschler, Shelton, and Topoleski 2011), which covers virtually all private-sector workers. As a result, many public-sector workers are more dependent on employer-sponsored plans for retirement income than are their private-sector counterparts.
In 2011, 3,418 state and local public employee retirement systems were operating, 222 administered at the state level and 3,196 administered at the local level (U.S. Census Bureau 2012). Pennsylvania has by far the most local systems, accounting for nearly half of the nationwide total. However, locally-administered plans are much smaller than state plans, which hold about five of every six dollars invested in these systems. Combined, they held $3 trillion in assets in 2011 and covered 19.5 million members, including 14.5 million active members accruing benefits and 4.9 million inactive members. Another 8.6 million retirees received periodic benefit payments worth $216 billion (U.S. Census Bureau 2012), an average annual benefit in 2011 of about $25,000.
There are two main types of retirement plans—defined benefit (DB) plans and defined contribution (DC) plans. DB plans, which have become less common in the private sector over the past generation, still cover most public-sector employees. In 2013, 92 percent of full-time state and local government employees were offered DB plans by their employers, compared with 22 percent of their private-sector counterparts (Bureau of Labor Statistics 2013). DB plans provide retirees with traditional lifetime pensions generally based on salary and years of completed service. The typical annual benefit is computed as a specified percentage of final average salary—usually calculated over the last three or five years of employment—multiplied by completed years of service. That percentage sometimes varies with years of service, for example increasing with seniority. Some plans also cap pension benefits so that they do not exceed a certain share of final average salary, such as 75 or 80 percent.
Employees may begin collecting benefits once they have left the payroll and satisfied the plan's eligibility criteria, usually based on age but sometimes on service years. For example, half of plans in our database offer age-25 hires full retirement benefits that begin by age 55. Most plans offer reduced benefits to employees who separate before the normal retirement age, as long as they meet certain age and years of service requirements. Sometimes the payment reductions are roughly actuarially fair, with the monthly benefit cut almost exactly offsetting the increased number of payments received by early retirees. In that case, the expected value of lifetime payments would be about the same if an employee who separated at the early retirement age immediately began collecting benefits or waited until reaching the normal retirement age. Many plans, however, subsidize early retirement, enabling employees to maximize their lifetime payments by collecting benefits early.
Once state and local government employees begin collecting their pensions, they are usually entitled to cost-of-living adjustments (COLAs) designed to help maintain their benefits' purchasing power in the face of inflation. Sometimes COLAs do not kick in until retirees have collected their pension for a few years or have reached a certain age (such as 65). However, many state and local plans have recently reduced or suspended COLAs as their financial problems have worsened.
In exchange for these benefits, most state and local government employees must contribute a portions of their salaries to their retirement plan. In 2013 9 of 10 plans in our database required employee contributions, and the median amount was 7 percent of salary. Employee contributions totaled $40.3 billion in 2011, accounting for 30 percent of all contributions to public employee retirement systems (U.S. Census Bureau 2012).
Workers who leave the government payroll before they can begin receiving their retirement benefits may usually begin collecting their pensions once they are old enough, as long as they have worked enough years to "vest" in their benefits. About half of the plans in our database vest employees after five years of service; about a third of plans require employees to have completed 6 and 10 years of service. Few allow employees to vest before they complete 5 years of service or require more than 10 years (except for plans covering police officers and firefighters). Workers who separate before vesting usually have their retirement plan contributions refunded to them, generally with interest. Most plans also give separating employees—even those who have vested—the option of collecting a refund of their required contributions and forgoing a future pension instead of waiting to collect their benefits.
Some state and local governments offer their employers DC plans. These are now the most common retirement plan provided by private employers, offered to 69 percent of full-time private-sector employees in 2013 (Bureau of Labor Statistics 2013). Thirty-six percent of state and local government employees were offered DC plans by their employers in 2013, but only 17 percent of employees participated. Most DC plans in the public sector supplement DB plans, which continue to serve as the primary retirement plan, but they do serve as stand-alone retirement plans in a few states.
DC plans specify the contributions that employers make to retirement plans instead of promising lifetime retirement payments based on salary and years of service. Employers that provide 401(k)-type plans—the most common type of DC plan—contribute to a retirement account in the participant's name, usually as a percentage of salary. Employees may also contribute to their retirement accounts and defer taxes on their contributions until they withdraw funds from their accounts. Employer contributions sometimes depend on how much the participant contributes. Some employers, for example, match worker contributions up to a specified percentage of salary, providing little to employees who do not contribute much to their retirement plans. Balances grow over time with contributions and market investment returns and may continue to grow after employees separate from their employer as long as they do not spend their balances. As in DB plans, most DC plans specify a vesting period. Employees who separate before they have completed the minimum service requirement forfeit their employer's contributions and associated investment returns. Employees manage their accounts, choosing among various investment options. Account holders may use the funds to purchase an annuity that provides lifetime retirement income.
In addition to standard DB and DC plans, some state and local governments offer retirement plans that blend features of the two archetypes. An increasingly common retirement savings vehicle in both the public and private sectors is the cash balance plan. As in a DC plan, employees and employers contribute a certain percentage of salary to employee accounts each period. Benefits are expressed as individual account balances, but employee accounts are pooled and professionally managed, as in traditional DB plans. Depending on plan rules, the accounts earn fixed returns, market returns, or market returns that cannot fall below some minimum. Employees can typically either withdraw their account balances when they separate from government employment, or convert their balances into a lifetime annuity at or after the plan's retirement age. Some states and localities now offer hybrid plans that include both a DB and DC component. In such hybrid plans the individual DB and DC components are generally smaller than in the stand-alone plans. For example, the DB plan multiplier might be 1 percent in a hybrid plan instead of 2 percent in a stand-alone plan, and employers might contribute only 4 percent of salary to an employee's DC account instead of 8 percent.
How We Grade Plans
When grading state and local retirement plans, we evaluate how well they perform on three broad criteria:
- Do they place both short- and long-term employees on a path to retirement security?
- Do they create the proper incentives for employees so governments can attract and retain a productive workforce?
- Are plans setting aside enough funds so they can finance the future benefits they have promised employees?
Our evaluation of plan finances is based on the plan's own actuarial assumptions, and our evaluation of retirement security and workforce incentives are based on simulations of pension benefits earned by representative employees. Those employees are assumed to earn average salaries throughout their careers, beginning at age 25. The simulations assume an annual nominal interest rate of 5 percent and inflation rate of 3 percent. Each grading criteria is discussed in more detail below.
Providing Retirement Income Security to Employees
The primary purpose of retirement plans is to offer employees some economic security in old age, providing income to replace the earnings they lose when they retire. A well-designed retirement plan should provide retirement security to employees who spend their entire career in the plan, but it should also allow those employees who spend less than a full career with a single employer to accumulate financial resources for retirement.
How much retirement security is afforded employees depends on various plan details. In DB plans the service multiplier is key; the higher the factor applied to final average salary for each year of completed service the more pension income retirees will receive. In DC plans, how much employers and employees contribute each period substantially determines the amount of resources available for retirement. Social Security coverage is another important factor, because it generally replaces between 30 and 40 percent of final salary depending on lifetime earnings and when workers begin collecting benefits.
Short-tenured employees generally earn much less retirement income from DB plans than their longer-tenured counterparts. Not only do DB pensions depend directly on years of completed service, they are also tied to final average salary. Benefits for employees separating at relatively young ages are based on early-career earnings, which are generally much lower than late-career earnings because salaries tend to rise over time with individual experience, economy-wide productivity gains, and inflation. Shorter-term employees tend to benefit more from DC and cash balance plans, because their account balances continue growing with investment returns after they separate; their benefit is not frozen at separation as in more traditional DB plans. Vesting requirements can also limit retirement benefits for shorter-term employees, who are not eligible for any benefits if they separate before they vest.
To grade plans on retirement security, we simulate retirement income for full-career employees and short-term employees. In both cases we generally assume that employees begin working at age 25, earn average salaries for their occupation and age throughout their careers, and stop working when they turn 65. Both representative employees, then, work for 40 years and earn the same salaries. The full-career employee is assumed to remain with their original employer for their entire 40-year career. The short-term employee is assumed to separate after eight years, at which point she begins a new job with a different employer that offers a retirement plan with the exact same rules as the original employer. The pattern repeats until she has held five eight-year jobs over 40 years. The simulations treat employees in police and fire plans somewhat differently. We assume they have 30-year careers, working from age 25 to 55, because employees in hazardous positions tend to retire early. The full-career employee is assumed to work for the same employer for 30 years, whereas the short-term employee is assumed to hold three eight-year jobs and one six-year job. This approach allows us to assess how plan design affects retirement security for people who work their entire lives but change jobs frequently.
The simulations assume that employees begin collecting their pension and Social Security (if covered) at age 65 and compare income at age 70 from these two sources to inflation-adjusted earnings received at age 64, the last year they are assumed to have worked. (We assume that police officers and firefighters begin collecting their pensions at age 55—or as soon as they qualify if not yet eligible at age 55—and we compare age-70 income to inflation-adjusted earnings received at age 54.) We assume that short-term employees keep their retirement resources in the plan until age 65 (or age 55)—that is, they do not take a refund on their contributions to the traditional DB plan and they do not withdraw funds from their DC or cash balance accounts. DB and cash balance pensions are determined by plan rules. We assume that DC plan accounts earn 5 percent nominal interest each year (2 percent real) and that employees contribute only the minimum required amount to their accounts (or that they contribute the minimum amount that generates the maximum employee match if the plan does not specify a minimum contribution). DB plan participants are assumed to collect their pension as a single-life annuity that ends when they die, providing no survivor benefits to their spouse. DC and cash balance plan participants are assumed to purchase a lifetime annuity at retirement with their account balances. Pension income for short-term employees is computed by summing the pension benefit amounts received from the employees' five (or four) jobs.
All employees are assumed to face a full retirement age for Social Security of 67, the existing retirement age for workers born in 1960 or later. Because we assume they take up Social Security at age 65, they receive only 86.6 percent of their full benefits. Social Security replaces 32 percent of age-65 salary for our representative teachers, 36 percent of age-54 salary for our representative police officers and firefighters, and 37 percent of age-65 salary for our other representative state and local government employees. Letter grades for retirement security provided to both short- and long-term employees are assigned based on the share of age-64 salaries (or age-54 salaries for police and fire plans) that are replaced by retirement income (pension benefits and Social Security, if covered), according to the following schedule:
- A if retirement income at age 70 replaces at least 80 percent of final salary;
- B if replacement rate is at least 70 percent but less than 80 percent;
- C if replacement rate is at least 60 percent but less than 70 percent;
- D if replacement rate is at least 50 percent but less than 60 percent;
- F if replacement rate falls below 50 percent.
Attracting and Retaining a Productive Government Workforce
The change in lifetime retirement benefits from working an additional year can significantly affect employee compensation. In addition to their salaries, most full-time government employees receive fringe benefits each year, including health insurance and the promise of additional future pension benefits. When another year of service increases the value of lifetime pension benefits, the retirement plan boosts total compensation and creates incentives for employees to remain with their employer. However, lifetime retirement benefits do not always grow smoothly, especially in traditional DB plans. In many of these plans, for example, younger employees must work many years before they accumulate future retirement benefits worth more than the value of their own required plan contributions, providing few rewards to younger adults who might change jobs relatively frequently. The value of lifetime benefits sometimes spikes after two decades or so on the job, creating strong incentives for employees to remain on the job until they realize those rewards, even if the job is a poor match with their skills and they could be more productive elsewhere. But working an additional year after the plan's retirement age can reduce lifetime pension benefits because workers forfeit a year of benefits for every year they remain on the job, cutting total compensation and creating strong retirement incentives. We rate plans on how well they advance governments' employment goals by promoting their ability to recruit and retain productive employees, based on our estimates of how lifetime pension benefits change over a career. Grades are assigned based on rewards provided to younger workers, a plan's ability to promote a dynamic workforce by not creating incentives that lock in mid-career employees, and the extent to which they encourage work by older, late-career employees.
Rewarding Younger Workers
Traditional DB plan participants often do not accumulate many future retirement benefits early in their career. Benefits for workers who separate early are based on the relatively low salaries they received at younger ages, not the higher salaries typically received at older ages. Additionally, early-career plan contributions by employees are worth more than the same amount contributed later, because they could have earned interest longer if invested outside the plan. As a result, the value of required plan contributions often exceed future pension benefits until participants have worked long enough to receive generous pensions.
For example, consider employees hired at age 25 enrolled in a traditional DB plan that provides annual benefits equal to 1.67 percent of final average salary (averaged over the last five years) times years of service. Benefits vest after five years, so employees who complete less service do not receive any pension benefits. In this hypothetical (but fairly typical) plan, employees must contribute 8 percent of their salary to the plan each year and may begin collecting benefits at age 65. Benefits are adjusted each year after retirement to keep pace with inflation.
Source: Authors' calculations.
Note: The figure reports the value of lifetime pension benefits and required employee contributions for employees hired at age 25 earning average salaries and enrolled in a traditional plan that provides annual benefits equal to 1.67 percent of final average salary times years of service. Benefits vest after five years, and retirees may begin collecting at age 65. The required employee contribution rate is 8 percent. Calculations assume 5 percent nominal interest and 3 percent inflation.
Lifetime pension benefits in this hypothetical plan grow slowly early in a career (figure 1). After 10 years of service, for example, employees earning average salaries would accumulate $24,000 in future lifetime pension benefits (expressed in constant 2014 dollars). These employees would receive annual payments equal to $5,800, replacing 17 percent of final average salary, but they would have to wait 30 years to begin collecting. By contrast, employees' plan contributions would be worth $32,000 after 10 years of service, one-third more than the value of their future pension benefits. Those future pension benefits grow rapidly with additional service years, but in this example employees must work 16 years before their future benefits are worth more than the value of their plan contributions, assuming those plan contributions could earn 2 percent real interest per year if invested outside the plan.
Younger workers in DC and cash balance plans generally accumulate lifetime retirement benefits more quickly. Unlike their counterparts in traditional DB plans, their retirement benefits are not frozen if they leave their employer many years before retiring. Instead, their account balances will continue to earn investment returns regardless of where they work.
We grade how well plans reward younger workers by calculating the value of lifetime pension benefits net of employee contributions that workers hired at age 25 accumulate in their first 10 years of service and comparing it to the maximum value of lifetime pensions they could accumulate. Lifetime benefits are measured relative to salary. Grades are assigned according to the following schedule:
- A if the ratio of lifetime benefits after 10 years of service to maximum benefits is at least 10 percent;
- B if the ratio is at least 5 percent but less than 10 percent;
- C if the ratio is at least 3 percent but less than 5 percent;
- D if the ratio is greater than zero but less than 3 percent;
- F if the ratio is zero.
Promoting a Dynamic Workforce
Although employees in traditional DB plans hired at relatively young ages do not accumulate many benefits early in their career, the value of lifetime benefits often grows rapidly as employees approach retirement age. As workers move through their careers, years of completed service increase, final average salary generally rises, and they do not have to wait as long to begin collecting their pension, all of which boost the value of lifetime benefits. Sometimes plan rules cause the value of lifetime benefits to surge at particular ages. Such spikes create strong incentives for employees to remain with the employer until they qualify for those windfalls and can lock mid-career employees into their jobs even if they are not good fits and could be more productive elsewhere. Employees who end up separating before receiving those milestones could forfeit tens of thousands of dollars worth of future retirement benefits.
Source: Authors' calculations.
Note: The figure reports the value of lifetime pension benefits and required employee contributions for employees hired at age 25 earning average salaries and enrolled in a traditional plan that provides annual benefits equal to 1.67 percent of final average salary times years of service. Benefits vest after five years, and retirees may begin collecting at age 65 or at age 50 if they have completed 25 years of service. The required employee contribution rate is 8 percent. Calculations assume 5 percent nominal interest and 3 percent inflation.
As an example of how lifetime benefits can spike in traditional DB plans, consider the plan described earlier in our discussion of rewards to younger employees. Figure 2 shows how the value of lifetime benefits grow over a career if we allow employees to begin collecting full benefits either at age 65 or, if they have completed 25 years of service, age 50—a provision found in many DB plans. The age-50 retirement option causes the value of lifetime benefits to surge after 25 years of service for 25-year-old hires. Those who separate after 24 years of service must wait 16 years to begin collecting their pension, but if they work just one more year than can collect immediately and receive an additional 15 years of benefit checks. DC and cash balance plans do not usually generate such spikes in lifetime benefits.
We grade how well plans promote a dynamic workforce by identifying the year after age 45 in which the value of lifetime pension benefits grows fastest and computing the share of lifetime benefits earned to date that accumulate in that year. Lifetime benefits are measured net of employee contributions for those hired at age 25. Grades are assigned according to the following schedule:
- A if the ratio of lifetime benefits earned in the peak accrual year to total benefits is no more than 5 percent;
- B if the ratio is more than 5 percent but no more than 10 percent;
- C if the ratio is more than 10 percent but no more than 25 percent;
- D if the ratio is more than 25 percent but no more than 50 percent;
- F if the ratio is more than 50 percent.
Encouraging Work at Older Ages
The value of lifetime benefits in traditional DB plans often decline at older ages, once employees can begin collecting benefits. Employees forfeit a pension check each month they remain on the payroll after they can begin collecting. Additional service may increase the size of each check, but not usually by enough to offset fully the lost payments. Some plans cap benefits at some share of final average salary, such as 75 or 80 percent, causing lifetime benefits to fall even more sharply when long-tenured employees remain at work. By reducing total compensation, retirement plans that reduce the value of lifetime benefits for older employees effectively tax work at older ages and create strong incentives for workers to retire. This is particularly problematic as the workforce grows older and the growth of the younger worker pool is stagnating. Lifetime benefits do not generally fall in DC or cash balance plans because their account balances can continue to grow regardless of an employee's age.
We rate plans on how well they encourage work at older ages by computing the average annual change in lifetime pension benefits associated with working from age 65 to 69. The change in lifetime benefits is measured net of employee plan contributions and as a percentage of salary for employees hired at age 25. Grades are assigned according to the following schedule:
- A if lifetime benefits grow on average each year from ages 65 to 69;
- B if benefits do not grow but do not fall more than 10 percent each year;
- C if benefits fall by more than 10 percent per year but less than 25 percent;
- D if benefits fall by more than 25 percent per year but less than 50 percent;
- F if benefits fall by more than 50 percent.
Some retirement plans include deferred retirement option programs (DROP) that generally protect pension benefits for older employees who remain on the payroll. Although specific provisions vary across plans, they generally deposit into special trusts the pension benefits that older employees who remain at work would have otherwise forfeited and allow these employees to access the funds once they leave the payroll. Our database indicates whether each plan includes a DROP but does not provide any programmatic details. We assign plans with DROPs a grade of B if they otherwise would have received a lower grade.
We treat police and fire plans somewhat differently because they cover employees in hazardous and physically demanding jobs for whom work after age 65 may be less appropriate. As a result, we base grades for police and fire plans on the change in lifetime benefits from working between ages 55 and 59 (or during the five years before mandatory retirement for plans covered by such provisions).
Adequately Funding Future Benefits
Benefits promised by retirement plans are not worth much if plans lack the financial resources to deliver on those promises. Retirement plans set aside funds each year to cover future benefit obligations. However, some plans do not set aside each year the full amount indicated by their own actuarial calculations, and many plans have not accumulated enough funds to cover all of their future obligations.
We rate plans on whether they set aside enough funds each year to cover accruing obligations and whether they have amassed enough funds to cover their accumulated benefit obligations. The annual contribution grade is based on the share of the plan's annual required contributions that have been paid over the last four years. The funding grade is based on the share of the plan's actuarial liabilities that is covered by the actuarial value of their assets. Grades for both measures are based on the following schedule:
- A if the ratio is at least 100 percent;
- B if the ratio is less than 100 percent but at least 90 percent;
- C if the ratio is less than 90 percent but at least 75 percent;
- D if the ratio is less than 75 percent but at least 60 percent;
- F if the ratio is less than 60 percent.
These financial measures were collected from the plans' annual financial reports and actuarial valuations and use the actuarial assumptions adopted by the plan's trustees. All tiers in the same plan receive the same financial grades because plans do not fund tiers individually. DC plans always make their annual contributions and are fully funded because plan accounts are owned by individual employees.
Aggregating Grades Within and Across Plans
We compute a grade point average from the seven grades for each measure, assigning four points for an A, three points for a B, two points for a C, one point for a D, and no points for an F. This grade point average is then converted back to a letter grade. However, we assign an overall grade of F to a plan that does not receive at least four grades of D or better on the individual measures. We create aggregate grades for each occupation within a state by weighting each tier by the number of employees it likely covers, as estimated from hire dates of participants. We aggregate across occupations within each state to create an overall state grade by weighting each occupational score by the number of state and local employees in that occupation, according to estimates from the 2011 American Community Survey.Return To Map
- Bureau of Labor Statistics. 2013. "Employee Benefits Survey: Retirement Benefits, March 2013." Washington, DC: U.S. Department of Labor. Available at http://www.bls.gov/ncs/ebs/benefits/2013/benefits_retirement.htm.
- Johnson, Richard W., Matthew M. Chingos, and Grover J. Whitehurst. 2013. "Are Public Pensions Keeping Up with the Times?" Washington, DC: The Brookings Institution.
- Jessie, Lisa, and Mary Tarleton. 2014. "2012 Census of Governments: Employment Summary Report." Washington, DC: U.S. Census Bureau. Available at http://www2.census.gov/govs/apes/2012_summary_report.pdf.
- Munnell, Alicia H., Jean-Perre Aubry, Josh Hurwitz, and Madeline Medenica. 2013. "The Funding of State and Local Pensions: 2012-2016." Chestnut Hill, MA: Center for Retirement Research at Boston College.
- National Conference of State Legislatures. 2013. "Pensions and Retirement Plan Enactments in 2012 State Legislatures." Denver: National Conference of State Legislatures. Available at http://www.ncsl.org/documents/fiscal/2012_pension_summary.pdf.
- Novy-Marx, Robert and Joshua D. Rauh 2011. "Public Pension Promises: How Big Are They and What Are They Worth?" Journal of Finance 66(4): 1211-49.
- Nuschler, Dawn, Alison M. Shelton, and John J. Topoleski. 2011. "Social Security: Mandatory Coverage of New State and Local Government Employees." CRS Report for Congress. Washington, DC: Congressional Research Service.
- Snell, Ron. 2012. "State Pension Reform, 2009-2011." Denver: National Conference of State Legislatures.
- Wiatrowski, William J. 2012. "The Last Private Industry Pension Plans: A Visual Essay." Monthly Labor Review 135(12): 3-18.
- U.S. Census Bureau. 2012. "2011 Annual Survey of Public Pensions: State & Local Data." Washington, DC: U.S. Census Bureau. Available at http://www.census.gov/govs/retire/.
- About one in eight plans covering police officers and firefighters in our database require more than 10 years of service for participants to vest.
- Between 1990 and 2011, the share of all private-sector employees covered by DB plans fell from 35 to 18 percent (Wiatrowski 2012).
- Cash balance plans are classified under federal law as DB plans.
- We use data from the 2011 American Community Survey to construct earnings histories for school teachers employed by state and local governments, police officers and firefighters employed by state and local governments, and all other state and local government employees. This cross-sectional profile indicates how much more salary older workers earn than their younger counterparts. However, today's younger workers will earn more as they grow older than today's older workers because of inflation and productivity gains. Thus for each age after 25, we increase the annual salary observed in this cross section by 3 percent a year to cover inflation and by an additional 1 percent a year to cover overall productivity gains. We assume, however, that earnings do not increase after age 65.
- We compute lifetime benefits in traditional DB plans as the expected present value of the future stream of retirement benefits. We sum annual benefits that will be collected from the benefit take-up age until age 120—the assumed maximum lifespan—but discount future benefits by 5 percent per year and the probability that retirees will die before receiving their payments. Prices are assumed to grow 3 percent per year. The value of lifetime benefits in DC and cash balance plans is simply the account balance that has accumulated by the time workers separate from government employment. We assume account balances earn 5 percent per year. For all plans we compute the value of lifetime pension benefits net of employee contributions. This calculation shows the value of the government's contributions to the retirement plan. In traditional DB plans we subtract the value of employee contributions from the lifetime benefit stream, assuming those contributions would earn 5 percent returns per year if invested outside the plan. For DC and cash balance plans we calculate net benefits by considering only employer contributions to retirement accounts.
About the Researchers
Richard W. Johnson is a senior fellow in the Urban Institute's Income and Benefits Policy Center, where he directs the Program on Retirement Policy. He writes about economic security at older ages, especially state and local pension plans, employment and retirement decisions, and long-term care.
Barbara A. Butrica is a senior fellow in the Urban Institute's Income and Benefits Policy Center. Her research focuses on the economic security of the boomer generation, pensions, Social Security, and the engagement of older adults.
Owen Haaga is a research associate in the Urban Institute's Income and Benefits Policy Center. His research focuses on state and local pension plans, long-term care, and microsimulation modeling.
Benjamin G. Southgate is a research assistant in the Urban Institute's Income and Benefits Policy Center. His research focuses on older workers and state and local pension plans.
C. Eugene Steuerle is an Institute fellow at the Urban Institute, where he holds the Richard B. Fisher chair. Among past positions, he has served as deputy assistant secretary for tax analysis U.S. Treasury Department, president of the National Tax Association, and chair of the 1999 technical panel advising Social Security on its methods and assumptions.Return To Map