Most state and local government employees (83 percent of those working full time) participated in a defined benefit (DB) pension plan in 2018, and nearly all (94 percent) had access to such plans. These public pension plans typically provide pensions based on members’ years of service and average salary over a specified number of years of employment. Many members also receive cost-of-living adjustments that help maintain the purchasing power of their benefits in retirement. By contrast, in the private sector, where defined contribution (DC) or 401(k)-style plans dominate, only 16 percent of full-time workers participated in DB plans in 2018 (20 percent had access).
State and local pensions have attracted considerable attention in recent years. Inadequate contributions have left pension plans underfunded by at least $1 trillion and possibly by as much as $3 to $4 trillion depending on modeling assumptions.
How many state and local pension plans are there?
How are state and local pension plans funded?
How much do state and local pension plans contribute to retirement savings?
How do pensions affect state and local government budgets?
How are state and local government changing their pension plans?
All data come from the US Census Bureau’s Annual or Quarterly Surveys of Public Pensions unless otherwise noted.
How many state and local pension plans are there?
State and local governments sponsor more than 5,500 pension plans. Nearly 21 million members participate in these plans, including active public employees, former public employees who have earned benefits that they are not yet collecting, and current retirees.
Locally administered pension plans vastly outnumber their state counterparts: 5,232 versus 297. However, most plan members (90 percent) and assets (82 percent) are in state-administered systems, in part because many local government employees are covered by state plans. Almost 60 percent of local government pension contributions went to state-administered rather than local-administered plans in 2017.
Florida and Hawaii had one state-administered plan in 2017, while Massachusetts had the most with 14 plans. For locally administered plans, six states had no local plans in 2017 and eight states had more than 100. Pennsylvania had 1,594 locally administered plans in 2017, far more than any other state.
Assets in state-administered and local-administered government pension plans totaled roughly $4.0 trillion in 2017. Corporate equities accounted for two-thirds of assets. These investments are riskier than fixed-income assets, such as corporate bonds, US Treasury bonds, and other federal agency-backed securities, though they also tend to generate higher returns. Corporate equities have increased as a share of pension assets, averaging roughly 60 percent of total investments since the mid-1990s. In recent years, public pension plans have also increased their holdings of so-called alternative investments—private equity, hedge funds, real estate, and commodities—that could produce higher returns but also expose plans to more risk.
How are state and local pension plans funded?
Historically, state and local governments funded pensions out of general revenues on a pay-as-you-go basis. States and localities began prefunding pensions in the 1970s and 1980s after several private pension plans failed and Congress passed the Employee Retirement Income Security Act. Although the law did not apply to state and local governments, it mandated a congressional report of public pensions that found fault with many common practices at the state and local level.
Today, states and localities follow pension accounting standards set by the Government Accounting Standards Board (GASB). The standards require pension plans to retain actuaries to project future assets and liabilities based on demographic and economic assumptions. Actuaries then calculate the employer contributions necessary to cover liabilities incurred by current employees plus any amounts needed to address past unfunded liabilities.
Pension plans currently receive most of their annual income from investments rather than contributions. In 2017, 69 percent of total pension plan revenue came from net investment earnings, 22 percent came from employer contributions, and 8 percent came from employee contributions. Because investment returns are volatile, however, those shares vary widely over time.
How much do state and local pension plans contribute to retirement savings?
State and local government pensions are important to overall national savings, accounting for 19 percent of total retirement saving assets. By comparison, individual retirement accounts, such as 401(k)s, account for 28 percent of assets.
Public pensions are especially important for the 28 percent of state and local government workers not covered by Social Security. Social Security originally excluded state and local government employees because of constitutionality concerns over levying a federal payroll tax on states and local governments. Later congressional action allowed employees to enroll in Social Security, but Social Security coverage of state and local workers still varies widely by state: non-covered workers range from 2 percent in Vermont to 98 percent in Ohio.
How do pensions affect state and local government budgets?
In fiscal year 2016, state and local governments contributed 4.6 percent of direct general expenditures to employee retirement systems. This total includes contributions from the local government that is administering the system (i.e., the local agencies' employer share of contributions for their employees), contributions from other governments for their own employees to the government administering the system (i.e., a local government's contribution as employers to a state-run system), and state government contributions to its own system whether for its employees or on behalf of local employees.
Still, these contributions do not account for unfunded future liabilities and thus underestimate the full burden of pensions on state and local governments. Estimates of unfunded liabilities range from $1 trillion to $4 trillion. Differences among these estimates stem mostly from different discount rates used to calculate the value of future benefit obligations.
The present value, or PV, of future pension liabilities is calculated using the following formula: PV = FV/(1 + i)n, where FV is future value, n is the number of years in the future, and i is the discount rate. Pension plans have traditionally used a discount rate based on expected investment returns. However, many economists argue that the proper discount rate should also reflect the riskiness of the liabilities. Because pensions are often constitutionally or otherwise legally protected, these economists argue pension liabilities should be discounted using a rate closer to that of “risk-free” US Treasuries rather than higher rates based on past investment returns.
Other differences stem from actuarial cost methods used to allocate benefits to past and future service. Beyond valuing liabilities, plans have discretion over amortization methods, or how to “stretch out” paying off unfunded liabilities. Previously, plans had discretion over asset smoothing, or determining how and when swings in asset values were reflected in financial statements, but GASB now requires them to report assets at fair market values.
Paying down unfunded liabilities will require a combination of reforms (see next section) and tax increases or spending cuts. A 2016 Brookings study estimated state and local governments would need to reduce direct general expenditures 5.7 percent to ensure unfunded public pension liabilities do not rise—if they took no other actions. Similarly, the study reported state and local governments would need to increase total own-source revenues (taxes, fees, etc.) 5.3 percent to close the pension liability gap—again, if they took no other actions. Both estimates were national and did not account for the wide variation in unfunded pensions across states.
How are state and local governments changing their pension plans?
All states have enacted major changes to their public pension systems to reduce costs in recent years. Among the most frequent reforms are reduced benefit levels, longer vesting periods, increased age and service requirements, limited cost-of-living adjustments, and increased employer and employee contributions. Some governments have also moved new employees onto DC plans, or hybrid plans combining aspects of both DB and DC plans, in part because DC plans shift risk from employers to employees. However, public employees are contesting many of these changes in court, arguing that state and local government actions violate pensions’ contractual nature.
Going forward, pensions that are already underfunded may face additional demographic pressures, as fewer active workers are available to provide contributions that help support benefit payments to current retirees. According to Census, across all state and local governments, this ratio currently stands at 1.35-to-1, but there is a lot of variation. Only Wyoming had more than two active workers per retiree in 2017, while Alaska, the District of Columbia, Michigan, Pennsylvania, and West Virginia had fewer than one active worker per retiree.
Interactive Data Tools
Public Pension Simulator
Build Your Own Pension Plan
The State of Retirement: Grading America's Public Pension Plans
Public Pension Simulator
Build Your Own Pension Plan
The State of Retirement: Grading America's Public Pension Plans
Further reading
Evaluating Pension Reform Options with the Public Pension Simulator
Richard W. Johnson and Owen Haaga (2017)
Pension Plan Structures before and after the Pension Protection Act of 2006
Barbara Butricia and Keenan Dworak-Fisher (2015)
Negative Returns: How State Pensions Shortchange Teachers
Chad Aldeman and Richard W. Johnson (2015)
Reforming Government Pensions to Better Distribute Benefits
Richard W. Johnson (2015)
FAQs
State and Local Government Pensions? ›
The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans.
What are the two types of government pension? ›The Employee Retirement Income Security Act (ERISA) covers two types of retirement plans: defined benefit plans and defined contribution plans.
Can you collect both a government pension and Social Security? ›Yes. There is nothing that precludes you from getting both a pension and Social Security benefits. But there are some types of pensions that can reduce Social Security payments. Join our fight to protect Social Security.
Does local government pension affect state pension? ›Can I still receive a state pension if I am a member of the LGPS? There are currently two parts to the state pension; the basic state pension and the additional state pension. You will qualify for a basic state pension if you've made enough national insurance contributions in addition to your pension from the LGPS.
Do local government employees get a pension? ›How many state and local pension plans are there? State and local governments sponsor more than 5,500 pension plans. Nearly 21 million members participate in these plans, including active public employees, former public employees who have earned benefits that they are not yet collecting, and current retirees.
How much is a typical government pension? ›The first highlighted result, to the left, shows that the average pension for a typical retired state or local worker in California is $38,101. This average is for all retirees, regardless of how many years they worked, or when they retired.
Which state government has the best pension? ›Wisconsin. Wisconsin has got the most of its total pension system funded for the future; it has the largest funding ratio of any state in the country.
What is the average pension payout per month? ›Average Monthly Retirement Income
According to data from the BLS, average incomes in 2021 after taxes were as follows for older households: 65-74 years: $59,872 per year or $4,989 per month.
How much will my Social Security benefits be reduced? We'll reduce your Social Security benefits by two-thirds of your government pension. In other words, if you get a monthly civil service pension of $600, two-thirds of that, or $400, must be deducted from your Social Security benefits.
How long does a local government pension last? ›Overview. You can take your LGPS pension at any time from age 55 to 75, as long as you have met the two-year vesting period. You must take your pension by age 75. If your employer agrees, you can even take your pension without leaving your job – this is called flexible retirement.
What states are in pension trouble? ›
Most recently, in the face of potential budget shortfalls and fiscal uncertainty from the pandemic, a few states—including California, Colorado, Kansas, Oklahoma, Oregon, and South Carolina—postponed planned pension contributions for fiscal 2021.
What age do you get local government pension? ›You can take your pension benefits from age 55, without your employer's (or former employer's) consent; this applies to all members, irrespective of when you stopped contributing to the LGPS.
How do local government pensions work? ›Your pension is worked out every year and added to your pension account. Each year, 1/49th of your pensionable pay is put into your pension account. At the end of the year the total amount of pension in your account is adjusted in line with changes in the cost of living.
Who pays for local government pensions? ›Your employer pays the balance of the cost of providing your LGPS benefits. Every three years an independent actuary calculates how much your employer should contribute to the Scheme, after taking into account investment returns.
What state pays the most in Social Security? ›- Total Social Security Received: $9.34 billion.
- Total Number of Recipients: 6,166,205.
Plan Stability
Pensions offer greater stability than 401(k) plans. With your pension, you are guaranteed a fixed monthly payment every month when you retire. Because it's a fixed amount, you'll be able to budget based on steady payments from your pension and Social Security benefits.
Generally, a good retirement income is about 75% to 85% of the pre-tax income earned in your last working year. This rule-of-thumb reflects the following assumptions: you have been saving about 15% of earnings annually, you will maintain a balanced budget and you will pay less in taxes during retirement.
How much is a 20 year federal pension? ›Generally, your FERS benefit is 1% of your “high-3” average salary multiplied by your years and months of service. If you were at least age 62 at separation and had at least 20 years of service, your annuity is 1.1% of your “high-3” average salary multiplied by your years and months of service.
What is the highest paid pension? ›Biggest-ever CalPERS pension tops $400,000 per year. A former top investment official at CalPERS received the largest pension the retirement system has ever paid last year, according to Transparent California and reviews of pension data by The Sacramento Bee.
What is the most common pension? ›Defined Contribution (DC) pension plans
Sometimes known as 'money purchase,' this is a common type of pension plan. You can open a Defined Contribution pension plan on your own – sometimes called a personal pension plan.
Is government retirement good? ›
The IRS calls FERS, which took effect in 1987, “one of the best retirement systems in the world.” The system provides three kinds of retirement benefits: Social Security. Employees and the agencies where they work each contribute an amount equal to 7.65% of an employee's salary to Social Security.
Is $6,000 a month a good pension? ›With $6,000 a month, you have more money than the average retiree—Americans aged 65 and older generally spend roughly $4,000 a month—and therefore more options on where to live. Below, we list five spectacular places where you might consider spending your golden years.
Is $3 000 a month a good pension? ›If you have a low living cost and can supplement your income with a part-time job or a generous pension, then retiring on $3,000 a month is certainly possible. However, if you have a high living cost or rely solely on Social Security benefits, retiring on $3,000 a month may be more difficult.
How much is a $30000 pension worth? ›As an example, examine how much an earned pension income of $30,000 would add to a person's net worth. A defined benefit plan income of $30,000 annually is $2,500 per month, which is 25 times $100.
How do I get the $16728 Social Security bonus? ›To acquire the full amount, you need to maximize your working life and begin collecting your check until age 70. Another way to maximize your check is by asking for a raise every two or three years. Moving companies throughout your career is another way to prove your worth, and generate more money.
How does a government pension affect your Social Security? ›Retirement and Disability benefit reduction
If your pension is from a government job or a job worked in a foreign country, and you have not paid Social Security taxes for at least 30 years of Substantial Earnings, your benefit may be reduced. We refer to this reduction as the Windfall Elimination Provision, or WEP.
Social Security benefits may or may not be taxed after 62, depending in large part on other income earned. Those only receiving Social Security benefits do not have to pay federal income taxes.
Is $1,500 a month enough to retire on? ›That means that many will need to rely on Social Security payments—which, in 2021, averages $1,544 a month. That's not a lot, but don't worry. There are plenty of places in the United States—and abroad—where you can live comfortably on $1,500 a month or less.
Where to retire on $4,000 a month? ›- If You Want Your Money to Go a Long Way: El Paso, Texas. ...
- If You Enjoy an Outdoorsy Lifestyle: Albuquerque, New Mexico. ...
- If You Want to Be Near the Beach: Sarasota, Florida. ...
- If You Crave Quality Arts and Culture: Colorado Springs, Colorado.
3 steps to claiming the $4,555 max monthly Social Security benefit.
What kind of pension do government employees get? ›
The FERS is a three-tiered plan made up of: a basic annuity, Social Security, and. a tax-deferred retirement savings and investment plan called the Thrift Savings Plan (TSP).
What is the most common pension type? ›Defined Contribution (DC) pension plans
Sometimes known as 'money purchase,' this is a common type of pension plan. You can open a Defined Contribution pension plan on your own – sometimes called a personal pension plan.
The Government Pension Offset, or GPO, affects spouses, widows, and widowers with pensions from a federal, state, or local government job. It reduces their Social Security benefits in some cases.
How many years do you have to work in the federal government to get a pension? ›You must work at least 5 years with the Federal Government before you are eligible for a FERS Federal Pension, and for every year you work, you will be eligible for at least 1% of your High-3 Average Salary History. Automatic deductions that can range from .
What type of pension is a local government pension? ›It is a defined benefit pension scheme which means your pension is based on your salary and how long you pay into the Scheme.
Who gets the best pension? ›Teachers, NHS staff, police officers and firefighters are among the top ten jobs with the best paying pensions, new research suggests. According to figures from Pension Times, teachers pay in between 7.4% and 11.7% of their salary into a pension and depending on their salary their employer pays a further 16.48%.
What is the riskiest type of pension? ›Only defined-benefit pension plans can be at risk of underfunding because an employee, not the employer, bears the investment risk in defined-contribution plans.
What is the highest basic pension? ›Minimum pension presently is Rs. 9000 per month. Maximum limit on pension is 50% of the highest pay in the Government of India (presently Rs. 1,25,000) per month. Pension is payable up to and including the date of death.
Will my government pension reduce my Social Security? ›Retirement and Disability benefit reduction
If your pension is from a government job or a job worked in a foreign country, and you have not paid Social Security taxes for at least 30 years of Substantial Earnings, your benefit may be reduced. We refer to this reduction as the Windfall Elimination Provision, or WEP.
The 50 – 70 rule is a quick estimate of how much you could spend during your retirement. It suggests that you should aim for an annual income that is between 50% and 70% of your working income.