Public Employee Pension Plans

Steven Kreisberg

Collective Bargaining DirectorAFSCME

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Scrutiny of public sector compensation

• Competing studies, some claim public sector workers are overpaid or have overly generous benefits– Fail to account for education (public employees

more likely to have a college degree or highly specialized training)

– Public sector workers tend to have greater seniority

– Directly responsible for health and safety in community 2

Public sector compensation

• National Institute on Retirement Security (Bender/Heywood) study:– Salaries of state and local employees are

11% lower than those with similar skills and abilities in private sector

– Benefits make up larger share of compensation for public employees – DB Pensions and Health Benefits

– Total compensation about 7% lower in public sector

• Other studies by Keefe; Schmitt; Munnell

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www.nirsonline.org

Defined Benefit Plan Fast Facts

• Over 2,600 public sector pension plans in the U.S. 15 million active employees 7 million retirees

• Public plans hold $2.9 trillion in assets – Funded ratio of about 70 percent– Funded at 86 percent prior to historic 2008 losses

• Average annual pension for an AFSCME member is about $19,000; average pay less than $45,000

• 30,000 private sector DB plans – down from high of 112,000

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Percentage of Employees in

Defined Benefit Plans, 1980 - 2010

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1980

1981

1982

1983

1984

1985

1986

1987

1988

1989

1990

1991

1992

1993

1994

1995

1996

1997

1998

1999

2000

2001

2002

2003

2004

2005

2006

2007

2008

2009

2010

0102030405060708090

100

PrivatePublic

Source: U.S. DOL National Compensation Survey, State and Local Government and Medium and Large Private Employers

Defined Benefit Plans – Typical Formula

Years of service = 25

Service credit multiplier = 2%

Final average salary = $40,000

Annual Benefit = $20,000

Specific eligibility age – reductions for “early” retirement

Employees can plan for retirement and employers can efficiently manage workforce

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DB Plan Funding: How Much is Needed Today?

• Pre-funding a benefit that is decades away from payment requires use of many assumptions

• Theory: the cost of the plan is spread out over each participant’s career to provide payments over a lifetime

• Normal cost: actuarial present value of benefits earned in the current year (usually percentage of payroll)

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Key Actuarial Assumptions

• Investment returns

• Salary: projecting an individual’s pay increases

• Withdrawal: length of service and turnover

• Age and service at retirement

• Inflation: COLAs

• Longevity8

Funding – Annual required Contribution

• Normal Cost (typically 9% to 14% of payroll)

Plus

• Payment towards Unfunded Liability (amortized over 20 to 30 years)

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Median annual public pension fund investment returns – periods ending December 31, 2010

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1 3 5 10 20 250

3

6

9

12

1513.1%

0.4

4.5 5

8.5 8.8

Source: Callan Associates and NASRA

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Source: U.S. Census Bureau

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“Reforms” Proposed for Many Plans

• Raise employee contributions

• Reduce multiplier

• Raise retirement age/years of service

• Lower or eliminate COLA

• Put new hires in defined contribution plans

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Defined Contribution Plan

• Designed to supplement – not replace – a traditional pension plan

• As a supplement: savings help maintain standard of living in retirement

• As a replacement: how much is needed?

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Defined Contribution Plans Put Individuals at Risk

• How much to contribute

• Asset allocation and reallocation

• Investment returns

• When to “retire”

• Longevity15

Defined Contribution Plan Data

• EBRI reports median 401(k) balance of $59,381 at end of 2009

• Wells Fargo reports that average American in their 50s has $29,000 for retirement– Would produce $190/month over 20 years– Americans estimate they will need $300,000

• Cumulative retirement savings deficit = $8 trillion

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Source: “A Better Bang for the Buck,” National Institute on Retirement Security. Amount necessary, when coupled with Social Security, to provide adequate retirement income.

Key Facts

• Pension benefits are modest, but meaningful

• Employees typically contribute 5% to 10% of pay

• Some employees are not in Social Security (25% to 30% are excluded)

• Pension costs are a small part of total government expenditures – challenge in greater in cities

• Conversion to DC (401k-style) plans is ineffective 18

More pension information, including state plan fact sheets, available at:

http://www.afscme.org/issues/75.cfm

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