State and Local Pensions Are Different From Private Plans

Introduction

The Center for Retirement Research at Boston College is undertaking a multi-year in-depth study of state and local pension plans; the study is funded by the Center for State and Local Government Excellence.  As a prelude to subsequent reports on various aspects of state and local plans, this brief identifies the key differences between employer-sponsored plans in the private and public sectors.  In fact, the two worlds turn out to be quite different.  In the private sector, the plans are mostly 401(k)s, less than half of the workforce is covered, and everyone participates in Social Security.  In contrast, state and local plans are primarily defined benefit, coverage is virtually universal, and only 70 percent of workers are in Social Security.  Public plans tend to provide higher basic benefit levels and tend to offer post-retirement cost-of-living adjustments.  Finally, public plans tend to rely more heavily on employee contributions, invest slightly more aggressively, and be about as well funded as their private sector counterparts…