Public Employee Pension Plans

Steven Kreisberg Collective Bargaining Director

AFSCME

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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

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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

5

19

80

19

81

19

82

19

83

19

84

19

85

19

86

19

87

19

88

19

89

19

90

19

91

19

92

19

93

19

94

19

95

19

96

19

97

19

98

19

99

20

00

20

01

20

02

20

03

20

04

20

05

20

06

20

07

20

08

20

09

20

10

0

10

20

30

40

50

60

70

80

90

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”

• Longevity

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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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17

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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