Public Pensions Pensions

Employees in the public sector—those working for state and local governments and the federal government—are in a number of respects better situated with respect to employer-provided pensions than are employees in the private sector. Virtually all full-time public sector employees participate in employer-provided pension plans. This contrasts with the private sector, where only about half of the full-time workforce participates in a pension plan at any given time.

State and local government pensions are predominantly defined benefit pensions—few state and local employees participate in defined contribution plans. Until the mid-1970s, private pensions were also predominantly defined benefit pensions. Since then, defined contribution pensions have grown in importance, while defined benefit pensions have declined, and by the end of the twentieth century defined contribution plans were more prevalent in the private sector than defined benefit plans. This trend has not occurred in the public sector, creating a significant difference between pensions for public sector employees and those for private sector employees. The difference in pension type is important for employees because in defined benefit plans the employer bears the financial risk associated with their funding, while in defined contribution plans the risk is borne by employees.

As well as having less financial market risk for employees, pension plans for public sector employees tend to be more generous than plans in the private sector. Most employees in state and local government are covered by plans permitting retirement at age fifty-five or earlier, frequently with just five or ten years of service required. The majority of state and local government employees (62 percent) are in plans that provide postretirement increases, most of which (73 percent) are provided automatically. These increases are intended to compensate retirees for increases in the Consumer Price Index (CPI), though they are typically capped at either a portion of the CPI change or an absolute ceiling. In contrast, only 7 percent of private sector plan participants in medium and large firms are in plans offering postretirement increases, and fewer than half of these participants are in plans where the increase is automatic. Public sector employees, however, usually pay part of the cost of defined benefit pension plans through their own contributions, which is uncommon in the private sector.