State and Local Worker Retirement Income Will Fall Short

October 18, 2011 ( - A widespread perception is that state-local govern­ment workers receive high pension benefits which, combined with Social Security, provide more than adequate retirement income.

However, a study from the Center for Retirement Research at Boston College that uses the Health and Retirement Study (HRS) and actuarial reports published by state and local pension systems, finds that most households with state-local employment end up with replacement rates that, while on average higher than those in the private sector, are well below the 80% needed to maintain pre-retirement living standards. Even those households with a long-service state-local worker – those who spend more than half of their careers in public employment – have a medi­an replacement rate, including Social Security, of only 72%. And this group accounts for less than 30% of households with a state-local worker.   

The remaining 70% of households with a short- or medium-tenure state-local worker have replacement rates of 48% and 57%, respectively. Add­ing income from financial assets still leaves most households short of the target.   

According to the CRR Issue Brief, data from the actuarial reports provide part of the explanation for these lower-than-anticipated replace­ment rates. Only 32% of workers who leave state-local employment each year claim an immediate benefit. These individuals have more than 20 years of service on average and receive a benefit equal to 49% of their pre-retirement earnings.   

But another 27% leave state-local employment with a de­ferred benefit based on their earnings at termination, which will decline in value between termination and claiming as wages and prices rise, so it will amount to less than 10% of their projected earnings at retirement. And 40% leave without any prom­ise of future benefits.   

The other part of the explana­tion is that most households with a state-local worker contain a person employed in the private sector, and replacement rates for private sector workers are con­siderably lower since many end up with nothing more than Social Security.

The DC Solution  

Commenting on the study, How Prepared Are State and Local Workers for Retirement?, funded by Great-West Retirement Services, Gregg Seller, Senior Vice President of Government Markets for Great-West, said that while pensions play an important role in providing retirement income, the study confirms they’re not enough. “Employees should take advantage of as many opportunities as possible to save for retirement,” Seller said, in a statement. “Most public sector employers offer voluntary retirement savings plans in addition to a pension, but only about 40 percent of employees enroll in them. Participation in these voluntary plans can help public sector workers increase their retirement savings on a tax-deferred basis and contribute to closing the income gap that many will face when they retire.”  

Seller said that if state and local governments automatically enrolled employees, it would help public sector employees close the retirement income gap. 

According to the Great-West statement, the state of Indiana voluntary deferred compensation plan, Hoosier S.T.A.R.T, is a testament to the benefits of automatic enrollment. It introduced the program earlier this year and currently is seeing 93% of its new hires remain in the plan. Just as important, the average salary for 62% of this group is less than $30,000 a year – dispelling the myth that lower income employees can’t afford to save.  

Seller said the study’s findings calls for a change in the way voluntary retirement savings plans are offered.  

The CRR Issue Brief can be downloaded at