Study Touts Vitality of Public Pensions

It’s not news that public pensions face many challenges, not the least of them funding issues. But a recent study suggests that all is not lost and that public pensions have more vitality than one may have thought.

In the National Institute on Retirement Security (NIRS) report, “Preserving Retirement Income Security for Public Sector Employees,” Executive Director Diane Oakley and Manager of Research Jennifer Erin Brown assess the results of an NIRS study of 89 public pension plans in order to analyze:

• the similarities and differences between the plans;

• employee contribution rates;

• vesting rates;

• interest rates paid on employee contributions;

• refundability of contributions; and

• the ability to purchase service credits.

“When it comes to their retirement finances, Americans are concerned with two things: a steady and adequate retirement income that will not run out, and the ability to move their retirement plans from job to job,” say Oakley and Brown. “These two characteristics can sometimes be seen as conflicting with one another. For example, if a plan is portable, that may limit the ability to accrue enough income to sustain a full retirement. Traditional defined benefit pension plans are typically seen as able to meet the goal of income security in retirement, while defined contribution (DC) plans are seen as more easily portable,” they note, but they take issue with those assumptions, saying, “It is not necessarily the case that DB plans cannot provide portability, nor that DC plans are unable to provide for secure retirement income.”

The key findings of this report include the following.

Almost all of the public retirement systems surveyed offer a DB plan. Not only that, they found that most public systems provide such plans to new members, and also give them the option of a DC plan. They also found that “only a very small number” of those public systems offered only a DC plan.

Many public pension plans now allow employees who change jobs to retain and increase their benefits. Just over 70% of the plans in the study credit their members with interest on their contributions if they leave and request a refund; in a majority of plans, participants who leave may later rejoin and repay their refund with interest. And most permit participants who have left to leave their account balances with the plan so that it may continue to earn interest.

In nearly all public systems, members may purchase additional service credits to increase their pension benefits. Oakley and Brown found that all public DB plans allow for the purchase of service credits for prior military service. Further, more than 50% of the plans surveyed allow participants to purchase credits for prior out-of-state government service. Some also allow them to buy credits for other kinds of service and leave.

A number of plans have features that increase benefits for short- or moderate-term employees. These features include:

• increasing the value of the deferred annuity benefits paid to former employees;

• rewarding employees who choose to keep their member accounts in the plan with interest; and

• providing even higher matching amounts.

These features, Oakley and Brown say, “can encourage workers who leave before retirement to preserve the lifetime retirement income benefits they have earned, rather than spend their refund.”

Oakley and Brown note that financial experts argue that saving should begin early in a career and that employees should save consistently and preserve retirement benefits if they change jobs. They report that NIRS found that public DB plans “stack up well on these points,” observing that public plans throughout the United States provide a variety of benefit designs and provisions, and that nearly all public systems consistently require employees to contribute toward the cost of their retirement benefits from the start and to continue doing so in each pay period;