Some Public Sector Pensions are Inadequate

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About 5 million employees in state and local government are not currently part of the Social Security system.

Federal law tries to protect them by requiring that their traditional government pensions provide the same retirement benefits they would receive if they and their employers were instead contributing to Social Security.

But the Center for Retirement Research finds that roughly 17 percent of these workers’ pensions fall short of that modest standard. The reasons involve how long they remain in their government jobs and how their pensions are calculated.

Let’s start with the workers who usually do not fall short: career public sector employees. They are protected because their pension annuities are based on their average salaries in the final years of employment when pay tends to be at its highest. In that way, pensions resemble Social Security. The benefits retain their value because they are based on a worker’s 30 highest years of wages, which Social Security adjusts upward at the rate of average wage growth.

Another group that is relatively unscathed are employees who have worked no more than five years in a government job. If they spend most of their careers in the private sector, they will accumulate many years of Social Security coverage in those jobs.

The government workers most at risk are in medium-tenure jobs lasting about 6 to 20 years, the researchers found. If they leave government mid-career, the wage growth they miss out on will have substantially eroded their pensions.

The researchers estimate that about 17 percent of public sector workers who currently aren’t covered by Social Security – 850,000 people and possibly more – are in this position.

These workers are at a big disadvantage. Their pensions aren’t even meeting the standard set by Social Security, which was designed to provide a minimum level of retirement income.

To read this study, authored by Jean-Pierre Aubry, Alicia H. Munnell, Laura Quinby, and Glenn Springstead, see “How Many Public Workers Without Social Security Could Fall Short?”

The research reported herein was derived in whole or in part from research activities performed pursuant to a grant from the U.S. Social Security Administration (SSA) funded as part of the Retirement and Disability Research Consortium.  The opinions and conclusions expressed are solely those of the authors and do not represent the opinions or policy of SSA, any agency of the federal government, or Boston College.  Neither the United States Government nor any agency thereof, nor any of their employees, make any warranty, express or implied, or assumes any legal liability or responsibility for the accuracy, completeness, or usefulness of the contents of this report.  Reference herein to any specific commercial product, process or service by trade name, trademark, manufacturer, or otherwise does not necessarily constitute or imply endorsement, recommendation or favoring by the United States Government or any agency thereof.

1 comment
geoffrey hewitt

Easy answer. Just take the total amount available you have in investments or savings and take the 4% rule. For example, 4% of 1 Million is 40k so one can take out 40K per year and not run out of money in retirement. The pension amount yearly can just be deducted from 40k to lower withdrawal amount. All simple math but most people never take finance or investment courses.

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