By Andrew G. Biggs
City and state governments around the country are pursuing reforms to address the rising costs of public employee pension plans. In response, public employee unions and pension plans themselves often portray these benefits as “modest.” In reality, public pension plans offer long-term government workers benefits that make them among the best-off retirees in the country. Indeed, the average full-career government worker in eight states retires as a “pension millionaire,” with 23 states paying $750,000 or more in lifetime retirement benefits. Drastic benefit reductions for current retirees would be unfair, but reforms that make public- and private-sector pensions more comparable should be on the table.
In presenting their benefits as “modest,” public pension plans and employee advocates commonly cite low average payments to retirees. For instance, the American Federation of State, County and Municipal Employees (AFSCME) declares that “the average AFSCME member . . . receives a pension of approximately $19,000 per year after a career of public service.”
This statement is false: for those who spend a career in government, public-sector pensions are far more generous. The average benefit for a full-career state government employee is roughly twice the $19,000 figure claimed by AFSCME, and in some states substantially higher. The low average benefit payments cited by pensions and public employee unions are produced by including employees who do not spend a full career working for the government. Short-term government employees do receive modest pension benefits, and many would be better off with a defined contribution (DC), 401(k)-type plan. Full-career public employees retiring today, by contrast, receive pension benefits that place them among the highest-income retirees in their states. […]
Another way to think about the value of public pension benefits is to consider total benefits paid out over an employee’s retirement. From this point of view, many state retirement systems produce what might be called “pension millionaires”—that is, employees who will receive more than $1 million in lifetime retirement benefits.
Figure 3 shows the present value of lifetime retirement benefits for full-career state government employees. Present value accounts for the fact that money can earn interest over time and thus can be represented as the lump sum balance, as of retirement age, that would produce the same pension benefits over the course of the worker’s retirement. These figures assume that the average full-career employee retires at age 60 and survives until age 84. The pension plan is assumed to pay an annual cost-of-living adjustment (COLA) of 2.0 percent. Present values are calculated assuming an interest rate of 3.5 percent, based on current yields on long-term Treasury securities.
A full-career state government employee in the average state receives a lifetime retirement benefit with a present value of $768,940. This means, for instance, that a worker who retires with a 401(k) balance of $768,940 could provide for himself a retirement income similar to that received by a typical full-career state government employee.
Just as annual public pension benefits vary by state, so do lifetime benefits. The most-generous benefits are paid in Nevada, where the average full-career employee will receive more than $1.3 million in pension benefits over the course of his retirement. In the four next most-generous states—Alaska, California, Colorado, and Oregon—lifetime benefits exceed $1.2 million. A wealthy, high-cost state such as Connecticut offers a typical full-career employee more than $1 million in lifetime benefits, but so does a relatively low-cost state such as West Virginia.
Even in the least-generous states, such as Mississippi and Indiana, a full-career state employee retires with pension benefits of more than $300,000. Both states also offer Social Security to their employees, with employer and employee splitting the 12.4 percent payroll tax.
Read more: American Enterprise Institute
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