The Urban Institute’s Program on Retirement Policy concludes that many workers, because they must contribute to their plans and do not usually spend their entire careers in government service, gain nothing from their state pension plans. They would have a richer retirement if they could simply invest on their own.
According to its analysis, only 19% of plans enable state and local government employees hired at age 25 to accumulate any employer-financed pension benefits within the first 10 years of employment. For teachers, the figure is just 14%.
In 22% of all plans, age-25 hires must work more than 25 years before their future pension benefits are worth more than their plan contributions. In 39% of teachers’ plans, age-25 hires who leave before 26 years of service get nothing from their pension plans other than their own contributions.
Recent reforms, focused mainly on cutting costs, have made things even worse, the researchers contend. About one-fifth of the plans changed their benefit rules between 2010 and 2013, with half effectively raising the time that employees must serve before getting anything out of their pension plans by three years or more.
“The traditional pension plans generally provide lucrative retirement incomes to long-term employees but offer little retirement security to workers who change employers several times over their career,” says Richard Johnson, the Urban Institute’s director of the Program on Retirement Policy, based in Washington D.C. “Traditional plans tend to encourage older employees to retire early, a problematic feature as the work force grows older. These plans may complicate government efforts to recruit younger employers and retain older ones.”
At the other end of the career span, long-tenured employees in 63% of plans lose lifetime pension benefits if they stay on the job beyond age 57.
For those at mid-career, much of their benefits will be typically earned in a single year, creating strong incentives for these workers to remain on the job until they realize these windfalls, even if they are ill-suited to the job or could be more productive or satisfied elsewhere, the analysis suggests.
Employees who keep working after they have maximized their pension benefits often suffer steep losses. On average, age-25 hires lose 48% of their maximum net lifetime benefits by working until age 67, Social Security’s full retirement age for those born after 1959.
The analysis found in traditional plans, there is often a year in which lifetime benefits jump, usually by triple the worker’s salary. On average, that one-year benefit surge accounts for nearly half of the expected lifetime benefits accumulated to that point. These spikes occur most often at age 55 for employees hired at age 25. In more than 10% of traditional plans (and more than 25% of police and fire plans) the maximum annual jump in lifetime pensions exceeds six times annual salary. The maximum across all plans approaches 11 times salary.
Short-career workers end up subsidizing often extremely generous benefits received by very long-tenured retirees, the researchers conclude. Cash balance plans and other alternative benefit designs, they suggest, would enable all state and local government employees to accumulate retirement savings gradually, including those with short careers, rather than restricting benefits to those with the longest tenures. Such alternatives would also attract younger employees who change jobs more frequently than earlier generations.
The Urban Institute analyzed 660 state-administered pension plans. The plans, detailed in a database, are graded on how well they place short- and long-term employees on a path to retirement security; how well employee incentives help government attract and retain a productive workforce; and whether the plans set aside enough funds to finance promised benefits. By these measures, only 1% of the 660 plans earned an A grade, while 11% had an F grade.