What do the states offer their public employees?
Here at NPPC, we are facing a few tough pension battles in various states across the country. We’re working with in-state coalitions to advocate for public employees’ retirement security in places like Alaska and North Dakota. And while we talk a lot about the states where pensions are in imminent danger, today we’re going to look at what retirement benefits are available to public workers nationwide.
Each of the states’ retirements systems falls into one of five categories:
- Defined Benefit (DB): A good, old-fashioned pension. A risk-pooled, employee group retirement plan established and maintained by an employer that uses an actuarially predetermined formula to calculate the amount of an employee’s retirement benefit. Defined Benefit pensions last a lifetime, providing guaranteed earned income for life.
- Defined Contribution (DC): A plan that provides an individual retirement account for each participant with benefits based solely on (1) the amount contributed to the participant’s account plus (2) any income, expenses, gains, losses, and forfeitures from other participants. Contributions to the account may be made by the employee or the employer. Defined contribution plans include 401(k), 403(b), and 457 plans. Defined Contribution plans are incredibly risky, and do not guarantee income. A bad turn in the market can deplete individual savings accounts.
- Hybrid: Some states offer DB + DC Hybrid retirement plans. Most of these compromised plans were developed under the guise of money-saving pension reform. Hybrid plans put a portion of investment decisions and subsequent performance on the shoulders of individual investors. By definition, hybrid plans are less reliable for individual workers. Contrary to what billionaire-funded think tanks like Equable and Reason may want people to believe, they do not provide the state with significant savings.
- Choice: Some states offer employees a selection between retirement vehicles. The combination of options varies, some states offer a choice between DB or DC, some between DB, DC, or a hybrid plan, and some states offer only a DC or a hybrid plan. Plan choice undermines retirement security by leading individuals away from the guaranteed monthly lifetime income that is only provided by Defined Benefit pensions. You can read a great piece about the downfalls of plan choice here.
- Cash Balance: Cash Balance plans can vary widely. A system of credits and balances, this type of plan also puts the brunt of financial planning on the individual employee and does not promise retirement security. Cash Balance plans are rare but not unheard of. You can read more about them here.
Navigating the different retirement plans from state to state is complicated. Plans utilize various strategies when it comes to administration, investing, calculating benefits, etc., which means no two plans are the same. It’s important to keep this in mind when you make a state-by-state comparison. The figures we’ve gathered below are courtesy of National Association of State Retirement Administrators (NASRA).
How many states only offer new employees a Defined Benefit plan?
- 29. Some states have different plans for different professions (teachers, public safety workers, judges, and other professions can sometimes be split into their own retirement systems within the state), and occasionally one of those systems has a different retirement offering.
How many states only offer new employees a Defined Contribution plan?
- 2. Currently, Alaska and Oklahoma ONLY offer their public employees a DC plan. Alaska eliminated its DB plan in 2006, and Oklahoma closed its DB plan for state employees in 2015. In Alaska, where public employees also have no access to Social Security benefits, the public safety staffing crisis has led to egregiously inadequate law enforcement presence in more than one-third of Alaskan communities. In much of the state, there is only one state trooper for every 1,000 square miles.
How many states only offer new employees a DB + DC Hybrid plan?
- 10. Some lawmakers have been erroneously informed that hybrid plans will cost states less to administer, but the truth is that hybrid plans are less attractive to potential new hires, as they are less stable than DB plans. Adding a DC element eliminates risk pooling, offering fewer promised funds than a DB.
How many states only offer new employees a choice between plans?
- 13. Pension critics, often in the form of billionaire-backed “think tanks” whose primary focus is making money for Wall Street bigwigs and not public employees, will often insist that employees can improve their retirement earnings if they are provided a choice between several employee-sponsored retirement vehicles. This is just not true. Knowing that Defined Benefit plans offer the better deal, public employees overwhelmingly prefer pensions to 401(k)-style plans. Reducing participation in a DB plan can lead to fiscal shortfalls, both for the system and the communities they serve.
How many states only offer new employees a Cash Balance plan?
- 3. Studies have shown that moving new employees from a DB to a DC or a Cash Balance plan can have significant repercussions in the form of increased taxpayer costs without improving funded status. While a Cash Balance plan is a great supplemental savings vehicle, it does not provide the same security that pensions do.
As legislative sessions continue, we hope to shake up a few of these numbers. We aim to return well-deserved pensions back into the hands of the public servants in Alaska and Oklahoma who keep their communities safe and operational, and to preserve pension benefits for the hard-working public workforce of North Dakota.
Want to get involved? Consider joining NPPC’s Rapid Response Team.