Retirement Income Gaps Persist for Government Workers

Female government workers save at lower rates than men in workplace defined contribution plans. 

Government workers saving in defined contribution plans have steadily increased their savings rates despite challenges created by the COVID-19 pandemic and economic uncertainty, according to a new report from Empower Retirement.

The Empower analysis, “Empowering America’s Financial Journey,” shows that state and local government employees are saving 6.4% of their salary in their workplace retirement plan, compared to 5.9% two years ago.

“Even with competing priorities, government employees have steadily increased their savings during the pandemic,” said Claudia Step, Empower’s senior vice president and chief customer experience officer, in a press release. “They have ranked saving for retirement as a top priority, and we are seeing that engaged participants are saving significantly more than unengaged participants.”

Fiscal challenges have forced many state and local governments to reduce pension plan benefits and payouts, and many public sector workers are not covered by Social Security, which increases the importance of DC plans in closing retirement income gaps. Most public sector workers are primarily covered by defined benefit plans, with DC plans taking the role of supplemental savings for this cohort.

Research has found that public sector employees may need help optimizing their DC plan participation and engagement to improve their retirement readiness, explained Dan Morrison, Empower’s government market head, in the release.

“It’s critical that both state and local government workers understand their future expected retirement income, as their pension plans may not fully meet their needs in retirement,” he said. “This will help them begin to plan appropriately and to fill any gaps along the way.”

The Empower analysis examines the savings behavior of 1.55 million active state and local DC plan participants with Empower as the recordkeeper. On average, female government participants are saving 15% less than men—6.0% compared to 6.9%, a larger gap than the private sector’s, which is 8% versus 8.5%, the report shows.  

Empower finds that government DC plan sponsors can impact participant savings rates, improve retirement readiness and close retirement income gaps. The analysis shows that when engaged with retirement planning, participants save nearly twice as much as unengaged workers, 8.2% compared to 4.2%, and savings rates increase to 9.9% for participants working with an investment adviser.

The analysis also shows that participants using a managed account have higher engagement and savings rates than government workers saving in a target-date fund.