Public employee pension plans in the United States

In the United States, public sector pensions are offered at the federal, state, and local levels of government. They are available to most, but not all, public sector employees. These employer contributions to these plans typically vest after some period of time, e.g. 5 years of service. These plans may be defined-benefit or defined-contribution pension plans, but the former have been most widely used by public agencies in the U.S. throughout the late twentieth century. Some local governments do not offer defined-benefit pensions but may offer a defined contribution plan. In many states, public employee pension plans are known as Public Employee Retirement Systems (PERS).

Pension benefits may or may not be changed after an employee is hired, depending on the state and plan, as well as hiring date, years of service, and grandfathering.

Retirement age in the public sector is usually lower than in the private sector. Public pension plan managers in the United States take higher risks investing the funds than ones outside the United States or those in the private sector.[1]

History

Public pensions got their start with various promises, informal and legislated, made to veterans of the Revolutionary War and, more extensively, the Civil War. They were expanded greatly, and began to be offered by a number of state and local governments during the early Progressive Era in the late nineteenth century.

Federal civilian pensions were offered under the Civil Service Retirement System (CSRS), formed in 1920. CSRS provided retirement, disability and survivor benefits for most civilian employees in the federal government, until the creation of a new federal agency, the Federal Employees Retirement System (FERS), in 1987.

Federal

Retired pay for U.S. Armed Forces retirees is, strictly speaking, not a pension but instead is a form of retainer pay. U.S. military retirees do not vest into a retirement system while they are on active duty; eligibility for non-disability retired pay is solely based upon time in service. Unlike other retirees, U.S. military retirees are subject to involuntary recall to active duty at any time, though the likelihood of such a recall is remote, especially after age 60. In 2008, there were 1,983,467 retired military in the US. There were 856,677 receiving military pensions, the remainder carrying their longevity into federal civil service positions.[3]

State

Each of the 50 US states has at least one retirement system for its employees. There are 3.68 million full-time and 1.39 million part-time state-level-government civilian employees as of 2002.[4]

Funding

Since 2001, U.S. statewide pension funds have experienced significant funding challenges due to the recessions of 2001-2002 and 2008-2009. Prior to the Dot-Com Crash, statewide pension funds were over 95.6% funded in the aggregate. In 2002, the funded ratio had declined to 82.1%. While funds did mostly recover by 2008, the Great Recession resulted in funded ratios declining to 63.8% in 2009.

Over the following decade, funding levels improved over 2009’s all-time low, until the Covid-19 pandemic ushered in an era of unprecedented market volatility. The on-set of the pandemic resulted in funded ratios dropping back down to 71.2% in 2021, followed by a rebound to 84.5% in 2021. In 2022, market corrections resulted in the largest single-year decline since 2009, bringing the aggregate funded ratio to 77.8%. [15]

As of July 2022, unfunded liabilities for statewide plans totaled $1.2 trillion. Statewide retirement systems account for the bulk of unfunded liabilities in the US. State Pension plans account for approximately 88% of all unfunded liabilities of non-federal retirement systems. While national aggregates provide insight into larger trends, the funded ratio of state pension plans vary significantly by state. The extent to which unfunded liabilities impact states is relative to their overall economic output. The size of unfunded liabilities relative to the size of a state’s GPD, provides a sense of the scale of resources that are needed to restore retirement systems to full funding.

Illinois, Kentucky, New Jersey are significantly burdened by the funding shortfalls facing their retirement systems. Nebraska, Utah, New York and Idaho’s unfunded liabilities are equivalent to less than 1% of their respective GDPs, meaning their pension funds are well-managed and do not significantly tax their economic resources.

Local

Many U.S. cities are allowed to participate in the pension plans of their states; some of the largest have their own pension plans. The total number of local government employees in the United States as of 2020 is 14.3 million. There are 11.1 million full-time and 3.1 million part-time local-government civilian employees as of 2020.[16]

Local Funding

Local plans are slightly better funded than statewide plans in the US. Local plans are 78.2% funded in 2022, compared to 77.8% for statewide plans. However, the historical funding trends of municipally-managed plans are similar, if not identical to statewide plans. Locally-managed public pension plans account for approximately 12% of all unfunded liabilities of non-federal retirement systems.

Benefits

Pension benefits in the U.S. can vary widely. The pension replacement rate, or percentage of a worker's pre-retirement income that the pension replaces, varies significantly across states and benefit tiers within state retirement systems. Whether or not a worker is enrolled in social security can significantly impact how secure a public worker’s retirement is. This varies widely by state and profession. [17]

Pension benefits are primarily designed to favor workers who work a full career (typically at least 25 years of service), which account for approximately 24% of state-level public workers. In a study of 335 statewide retirement plans, Equable Institute found that 74.1% of pension plans in the US served this group of workers well.

The same study found that workers with tenures of 10-25 years of service were served well by 10.9% of plans. Workers with less than 10 years of service were served well by .5% of plans. [18]

In another study, Equable Institute found that the total lifetime value of teacher pension benefits have declined by $100,000 on average (13%) since 2005. A teacher hired for the 2005 school year can expect to earn $768,000 in retirement benefits, where as a teacher hired for the 2023 school year can expect to earn $668,000. [19]

Further information: Local government in the United States

See also

References

  1. ^ "Pension Plans Put Under the Knife".
  2. ^ Federal, State, and Local Governments - Main Page
  3. ^ "Retired Military Personnel". Patrick Air Force Base, Florida: The Intercom (publication of the Military Officers Association of Cape Canaveral). June 2009. p. 4.
  4. ^ Compendium of Public Employment: 2002
  5. ^ "Department of Finance and Administration".
  6. ^ "INPRS: Indiana Public Retirement System (INPRS)". 9 February 2021.
  7. ^ "KPERS Home".
  8. ^ "LASERS – LASERS Benefits Louisiana".
  9. ^ "Maryland State Retirement and Pension System - MSRA". Maryland State Retirement and Pension System. 2 November 2018. Retrieved 2019-11-07.
  10. ^ "Home". mosers.org.
  11. ^ Nebraska Public Employees Retirement Systems Archived 2009-02-19 at the Wayback Machine
  12. ^ Public Employees' Retirement System of Nevada
  13. ^ "OPERS - A Partner in Your Future". OPERS. Retrieved 13 June 2015.
  14. ^ "TCRS Overview and Self-Service".
  15. ^ "State of Pensions 2022". Equable Institute. Retrieved 22 September 2022.
  16. ^ Dipold, Elizabeth (May 13, 2021). "Annual Survey of Public Employment & Payroll Summary Report: 2020" (PDF). United States Census Bureau. Retrieved July 13, 2021.
  17. ^ "Where Are State & Local Workers Allowed to Join Social Security?". Equable Institute. 13 September 2019. Retrieved 22 September 2022.
  18. ^ "Introducing the National Landscape of State Retirement Benefits Report". Equable Institute. 24 June 2021. Retrieved 22 September 2022.
  19. ^ "Introducing the Retirement Security Report Teacher Edition". Equable Institute. 28 June 2022. Retrieved 22 September 2022.

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