Retirement security concerns individuals across all sectors, but it holds particular significance for public employees. As they dedicate their careers to serving their communities, ensuring government workers’ financial well-being during retirement is vital to attract talented workers to public service. Pensions are just one piece of the retirement pie, though. Financial planners describe a sound retirement as a three-legged stool comprising Social Security, personal savings (including defined contribution retirement plans), and employer-sponsored defined benefit pensions. In this blog, we will explore why having access to all three legs is crucial for public employees.

Social Security: A Foundation for Retirement

Established in 1935, Social Security serves as the first leg of the retirement security stool. It provides a foundation of income that individuals can rely on during their retirement years. Although public employees may participate in other retirement plans, Social Security ensures basic financial support, regardless of the specific pension benefits received.

For some public employees, Social Security can supplement their pension income and provide a safety net in case of unforeseen circumstances. It offers disability and survivor benefits, protecting their families in need. However, roughly 25% of all state and government workers in America do not receive Social Security, including over two-thirds of public safety workers and 40% of public school teachers. Public employees in Alaska, Colorado, Louisiana, Maine, Massachusetts, Nevada, and Ohio are exempt from Social Security benefits. While Social Security may not be the sole source of retirement income for public employees, and in some cases not a source of income at all, it remains a critical component of the three-legged stool concept.

Personal Savings: Enhancing Retirement Security

The second leg of the stool, personal savings, enables workers to enhance their retirement security and maintain a desired standard of living. Public employees can accumulate additional funds by diligently saving and investing throughout their careers to meet their unique retirement goals and aspirations. Personal retirement savings often come in the form of 401(k)s, IRAs, and other defined contribution plans. 

However, it is essential to note the limitations of personal savings, such as defined contribution plans. While these accounts can be beneficial, they are not an adequate source of retirement income alone and were never designed to be the primary source of income for retirees. Because most public employees earn less than their private sector counterparts, saving a significant amount of money can be challenging. Additionally, managing these accounts can be more expensive, with fees and administrative costs eating into potential returns. Moreover, personal savings are subject to economic downturns without the protection of risk pooling, which can impact investment performance and potentially decrease the overall value of savings. 

Public Pensions: A Crucial Component

The third leg of the retirement stool for public employees is defined-benefit pensions. Pension plans provide a reliable income stream for life. For public employees whose states do not participate in social security, defined-benefit plans are essential. 

One advantage of a defined benefit pension is the assurance it provides retirees, as they receive a predetermined amount each month, based on an employee’s years of service and salary history, for their post-employment years. Pensions are funded by required contributions from employees, contributions from the state, and returns from risk-pooled investments. This strategy eases concern about market fluctuations or investment performance, ensuring stability that other retirement savings vehicles do not provide. Public pensions offer a sense of security, allowing public employees to retire with peace of mind, knowing they will have a steady income to support their retirement needs.

For public employees, the three-legged stool of retirement security remains crucial in ensuring a stable retirement. Social Security provides a foundation, personal savings enhance flexibility, and public pensions offer a reliable income stream. Together, these three pillars create a comprehensive approach to retirement security, enabling public employees to enjoy the fruits of their labor and ensure income during their golden years. Public employees can achieve a financially secure retirement by recognizing the significance of all three legs.