Public Pensions Pensions

Private pensions are regulated by the federal pension law called the Employee Retirement Income Security Act of 1974 (ERISA). This complex law, which has been amended numerous times, is the second longest law in the United States—only the tax code is longer. It is administered by three federal agencies: the Labor Department, the Internal Revenue Service, and the Pension Benefit Guaranty Corporation. The Labor Department administers sections of the law relating to the fiduciary responsibilities of plan sponsors and service providers. The Internal Revenue Service administers sections relating to allowable and required contributions and to tax deductions for pensions. The Pension Benefit Guaranty Corporation administers sections relating to the pension benefit insurance it provides for defined benefit plans.

The only pension plans not covered by this law are those for government employees and employees of religious organizations. State and local government pension plans and pension plans for federal government employees are subject to considerably fewer regulations, and public sector employees consequently have different, and generally fewer, legal protections. Many attempts have been made to bring state and local government plans under federal jurisdiction through introduction of legislation that would establish a public sector equivalent to ERISA. State and local government pension plans, however, continue to be regulated primarily by individual state and local governments. They are not subject to the regulations administered by the Labor Department and the Pension Benefit Guaranty Corporation. Government employees are subject to restrictions administered by the Internal Revenue Service concerning maximum allowable contributions and maximum allowable benefits, but the limits are generally higher than for the private sector. While state and local government plans are not subject to ERISA's reporting requirements, they must follow the financial measurement and reporting requirements imposed by the Governmental Accounting Standards Board (GASB). Private sector plans must follow the accounting requirements imposed by the Financial Accounting Standards Board (FASB).

At least in one respect, many employees in public plans have greater legal protection than do employees in private plans. Approximately half the states have either a state constitutional provision, a statutory provision, or past court rulings stipulating the right that the future accrual of pension benefits cannot be reduced for current employees. This right is not provided to private sector employees or employees in the federal government, where pension plan provisions can be modified to reduce the future accrual of pension benefits. Because of this right for many state and local government employees, pension reforms in those sectors tend to result in tiered pension plans, where a reform only affects newly hired workers, with previously hired workers maintaining their participation in the nonreformed plan.

Because state and local government plans are generally subject to fewer restrictions, they can have features that are not allowed in private plans. Thus, they serve as a laboratory for experimentation in plan designs that would not be allowed under current federal laws for private sector plans. For example, the pension plans for public employees in the state of Indiana provide for a rate-of-return guarantee for the defined contribution plan that is backed by the fund of the defined benefit plan. Such an arrangement would not be allowed in the private sector because it would violate the ERISA requirement that defined benefit plan assets be used only for the purpose of providing benefits from that plan.

Unlike the private sector, where all workers (except employees of religious organizations) are automatically covered by Social Security, state and local governments have the option of not choosing Social Security coverage for their employees if their employees are already covered by a state or local government retirement plan. State and local governments whose workers are currently not covered by Social Security can continue to exclude them from Social Security. For those workers, the public pension plan provided tends to be more generous than for private plans because it also replaces Social Security. State and local government employees not covered by a public retirement plan are automatically covered by Social Security. Since 1983, state and local governments can no longer terminate Social Security coverage for groups of employees already participating.