What’s wrong with this retirement picture?

14% of private sector workers have a traditional defined benefit pension. Meanwhile 84% of state and local government workers have such a pension and 100% of federal employees have a defined benefit pension.

What’s going on here?

In addition, federal workers and many state workers have a defined contribution plan (401k type) as well. And they have retiree health care coverage while less than 25% of private sector large employers offer such coverage (and declining especially for new hires).

The reason retiree health benefits have declined is not only the immediate costs, but the accrued liability which has a negative impact on employers. State governments have huge liabilities for both retirement and health benefits …. but they largely ignore them as do legislators and citizens.

These health benefit liabilities for covered workers totaled $627 billion in 2013 (latest data available from PEW Research) and states had funded only 6% of these liabilities.


  1. State government’s highest paid pensioners are police and firefighters. Most of the union contracts nation-wide allow overtime pay to be included in the calculations for retirement purposes.

    I know of a police force locally in which several police members made $200,000 last year, and many made more than $160,000. Half of that figure is overtime pay. Retirement calculations commonly use the formula of 2% of the “high 2” or “high “3” of annual wage a year for every year of service. So if a police officer made $200,00 for two or three years of his career and his career was 30 years, his retirement is $120,000 a year (more than his annual wage when overtime is not included.) . Salaries of state and local government employees in Washington State are easily accessible so these figures are accurate.


  2. “State governments have huge liabilities for both retirement and health benefits …. but they largely ignore them as do legislators and citizens.”

    It does seem that public pensions and retiree health benefits are a sweet deal, and they would be if they were fully funded. The fact that they are not means that their beneficiaries are counting on promises made by politicians who are probably long gone before the reality of the underfunded status comes to fruition. When the state and local pension systems start blowing up, the pensioners who were counting on them are in for a rude awakening. It’s unlikely that current legislators are going to feel compelled to make good on the promises of their predecessors and there is no pension benefit guarantee corporation for public pensions. Obviously, Federal pensions are in a different category due to their unlimited borrowing capacity. I think we are just starting to see the beginnings of the future public pension crisis.


    1. I do not foresee any state pension defaulting on payments to workers any more than SS will. Politicians will find a way to shift money and/or raise taxes.


      1. Let’s see where Puerto Rico goes. Even if the governors plan is accepted, a 10% cut would be viewed as a default. Every crisis has to start somewhere.

        “While many of Puerto Rico’s circumstances are unique, its case is also a warning sign for many American states and municipalities — such as Illinois and Philadelphia”

        “The governor’s fiscal plan also calls for shifting all current government workers from pensions into 401(k)-style retirement plans. Current retirees will continue to receive their traditional monthly pensions, but the amounts are to be reduced by about 10 percent on average.”


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