A new report out this week from the National Institute on Retirement Security offers some new insights about the portability of defined benefit pensions. According to the report, pensions have a fairly high degree of portability. One common criticism of pensions by anti-pension ideologues is that they aren’t portable, meaning, if you leave your job before retirement, you can’t take your pension benefits with you. These anti-pension ideologues will typically argue that defined contribution 401(k)-style plans are better because their benefits are portable. This is yet another falsehood about pensions peddled by these ideologues.
Preserving Retirement Income Security for Public Sector Employees, released yesterday, finds that a majority of public sector pension systems allow members to purchase service credits for prior military service or out-of-state government service. Let’s say, for example, that you are a public school teacher in Colorado. You have taught there for eight years, so you are fully vested in your pension. Then, you move to Wisconsin and continue to teach in a public school there. You are able to take your contributions, plus half of your employer’s contributions, from the Colorado pension system and use it to purchase service credits for the Wisconsin pension system, allowing you to preserve your pension benefits.
Most public pensions allow members to purchase additional years of service credits for a variety of different types of service, not just military and state government service. Thirty-one pension systems allow members to purchase service credit for time spent in the federal government. Forty-five allow the purchase of credit for personal leave, sick leave, or maternity leave. Some even allow the purchase of service credit for participation in programs like the Peace Corps.
In addition to the ability to purchase service credits for prior government service, most public pensions provide refunds of employee contributions with interest if that employee leaves before retirement. All public pensions provide refunds of the employee’s contributions if the employee leaves before retirement and requests a refund. 71 percent of the plans surveyed in the report provide some amount of interest in addition to the employee’s contribution if the employee requests a refund. In a few states, the employee can also receive part or all of their employer’s contribution if they request a refund.
In most pension systems, workers have the option to leave their contributions in their accounts, even if they leave their employer. The important thing here is that if the employee takes the refund, they move it to a different retirement system, in order to preserve future retirement income. Too many workers will take their refund and spend it all on immediate needs, rather than reinvesting it for future growth. The point of the contributions refund is for the employee to move it over to another retirement account.
Defined benefit pensions remain the most secure and reliable retirement plan for working families. Contrary to the claims of anti-pension ideologues, pensions do offer the ability to take your contributions with you if you leave your employer before retirement. For states looking to strengthen retirement security for their public employees, making sure their pensions are as flexible and portable as possible would be a good move.