As we’ve written about on this blog, the prevalence of defined benefit pensions has declined in the private sector and this has hurt working families. In the public sector, though, defined benefit pensions remain quite common. According to a recent report by the Center for State and Local Government Excellence, 93 percent of state and local government employees have access to a defined benefit plan and 82 percent participate in a defined benefit plan. These public employees highly value their pension benefit. Two-thirds of public employees rate their retirement benefits as a very valuable aspect of their job. Among police officers and firefighters, their pension is even more valuable, with 75 percent rating it as extremely important. While public employees obviously prize their defined benefit pension, many are still uncertain about exactly how much money they need to have a secure and dignified retirement.
In the survey of public workers by the Center for State and Local Government Excellence, a fifth of public workers were unsure how much to save for retirement. Advice from experts varies, but generally they recommend replacing somewhere between 70 and 80 percent of preretirement income during retirement. For workers participating in a defined benefit plan and Social Security, this calculation is not too difficult. With both a defined benefit pension and Social Security, it is possible to use the formulas to determine the percentage of your preretirement income that you will receive after you retire. For example, a teacher who earns $40,000 per year and teaches for 30 years, in a pension plan with a 1 percent multiplier, would be able to replace 30 percent of her income with her pension benefit. Social Security is designed to replace approximately 40 percent of income. So in this example, the hypothetical teacher would replace roughly 70 percent of her income in retirement, right at the level recommended by many experts.
One of the strengths of defined benefit plans is that they pay a guaranteed, monthly amount for life. Workers do not have to worry about outliving their retirement savings. For workers participating in defined contribution 401(k)-style plans, they do not have this certainty. Defined contribution plans do not pay a specific benefit amount during retirement. Instead, workers set aside a certain percentage of their salary for retirement and they may or may not receive a match from their employer. Often the amount that employees contribute is too low to ensure a secure retirement. It is also more difficult for workers in defined contribution plans to determine how much of their preretirement income they will be able to replace in retirement.
The majority of public sector employees surveyed by the Center for State and Local Government Excellence felt confident they would be financially prepared to retire. Three-fourths of public employees expect that their defined benefit pension will be a major source of income during retirement. This is why we fight to protect pensions: because they provide a dignified and secure retirement for working families.