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Public and Private Sector Defined Benefit Pensions: a Comparison

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Public and Private Sector Defined Benefit Pensions: a Comparison Public and Private Sector Defined Benefit Pensions: A Comparison The public and private sectors differ in the retirement benefits provided to covered employees. But these differences are less pronounced when factors such as employee contributions and Social Security coverage are considered. BY ANN C. FOSTER lthough employer costs for Statistics’ Employee Benefits Survey employee compensation (EBS)4 to make a detailed compari- Adiffer between the public son of public and private pensions. sector ($25.73 per hour worked) and Comparisons are made between full- the private sector ($17.49 per hour time workers in State and local worked), the proportions allocated to governments and those in medium employee benefits are roughly and large private establishments comparable: 30 percent for public (those employing 100 workers or sector employees and 28 percent for more). These establishments are private sector employees. Pensions comparable in size to most State and made up 7.4 percent of the total local governments.5 benefits package in the public sector and 3.1 percent in the private Retirement plan coverage sector1. The dollar cost differential In 1993-94, 96 percent of full- between sectors reflects differences time State and local government in the work activities and occupa- workers were covered by a retire- tions in each sector2. ment plan compared to 78 percent of The public and private sectors workers in medium and large private also differ in the incidence of establishments. Ninety-one percent employer-provided benefits. In 1993- of public employees participated in 94, for example, the incidence of defined benefit pension plans paid sick leave, medical and dental compared to 56 percent of private care, and life insurance was much employees. Among private sector higher among public sector employ- employees, however, defined ees than among private sector contribution plan coverage was employees. In the private sector, greater than among public employ- however, the incidence of benefits ees (49 percent compared to 9 for paid holidays and vacations was percent). Among workers with higher.3 defined benefit coverage, 3 percent Differences in the provision of of public employees and 45 percent retirement benefits between the of private employees were also public and private sectors has covered by a defined contribution received much attention. The focus plan.6 has often been the differential Social Security benefits are an between benefit amounts, without important component of most Ann C. Foster is an economist in the Division of considering the factors underlying workers’ retirement benefits. While Compensation Data Analysis and Planning, Bureau of Labor Statistics. Telephone (202) 606- these differences. This article uses Social Security coverage is universal 6222. data from the Bureau of Labor in the private sector, not all public 37 Compensation and Working Conditions Summer 1997 employees are covered. EBS data multiplied by years of service. For The impact of plan integration on show that in 1994, 76 percent of the majority of public sector partici- the benefits received depends on a full-time participants in public pants (61 percent), terminal earnings worker’s earnings level. Research pensions were covered by Social are the average of an employee’s using data from the 1991 EBS found Security.7 highest 3 years’ earnings. For most that for an employee retiring at age Therefore, a typical full-time private sector participants (83 65 with 30 years’ service and a final State and local government em- percent), terminal earnings are salary of $25,000 or less, integrated ployee is covered by a defined defined as the average of an plans replaced a lower proportion of benefit pension plan and probably employee’s highest 5 years’ earn- final earnings than nonintegrated Social Security. A typical full-time ings. plans. For a comparable employee employee in a medium or large The majority of participants in with a final salary of $35,000 or private establishment is covered by a plans with a terminal earnings more, integrated plans replaced a defined benefit and/or defined formula have a pension benefit greater proportion of final salary contribution plan and Social formula based on a flat percent or than nonintegrated plans.11 Security. factor that also varies by sector. The In the public sector, an The following sections compare average factor is 1.85 percent in employee’s required defined benefit provisions of defined benefit public plans and 1.48 percent in plan contribution and the formula pensions because most full-time private plans. If terminal earnings used to determine benefits vary by State and local government employ- of $50,000 are assumed, a public Social Security coverage status. ees are covered by these plans. employee with 30 years’ service Research using data from the 1990 would receive an annual retirement EBS found that the average benefit Employee contributions benefit of $27,750 ($50,000 x .0185 for public employees covered by A direct comparison of plan x 30); an employee in the private Social Security was 1.83 percent of benefits needs to account for sector with 30 years’ service would terminal earnings times years of employee contributions. EBS data receive a benefit of $22,200 service. For those not covered by show that in 1994, 72 percent of ($50,000 x .0148 x 30), or 80 Social Security, the average benefit public employees with defined percent of that received by the public was 2.18 percent times years of benefit coverage had to contribute to sector employee. service. Public employees covered its cost. The average participant by Social Security made lower contribution was 5.9 percent of Social Security average contributions to their earnings and ranged from 5.8 One way in which Social Security defined benefit pension plans (5.11 percent among white-collar workers affects pension benefits is through percent of earnings); their counter- to 6.2 percent among teachers; plan integration. For State and local parts without Social Security among blue-collar and service government workers, the employee coverage contributed 7.55 percent of workers the average was 5.9 percent. contribution and the formula used to earnings towards defined benefit In comparison, in 1993, 97 percent compute benefits vary by Social pension plans.12 of participants in medium and large Security coverage status. private establishments had benefits Plan integration occurs when Normal retirement entirely paid for by their employers. benefits are adjusted to account for Requirements for normal retire- Assuming the same employer employer Social Security costs. In ment differ considerably between the contribution, employees who 1993-94, 48 percent of full-time public and private sectors. For contribute to the cost of their private workers were in defined example, in 1993-94, two-thirds of coverage should expect to receive a benefit plans that integrated pension full-time public sector participants in larger benefit than comparable benefits with Social Security 8 defined benefit plans could retire at workers who do not contribute. compared to 4 percent of their public age 55 or earlier upon meeting counterparts.10 Benefit formulas service requirements and still receive Integration is usually accom- Virtually all full-time public normal (unreduced) pensions plished by varying the percent of employees (99 percent) covered by compared to one-tenth in the private earnings used to compute benefits. defined benefit pension plans were sector. (See table 1.) An example of a typical integrated subject to terminal earnings-based Forty-three percent of public formula is: formulas. In the private sector, only sector participants could retire at any 61 percent of defined benefit 1 percent of earnings up to age after satisfying a service require- participants were in terminal $25,000 x years of service ment, usually 30 years, much higher earnings-based plans.9 + than the 5 percent for participants in These plans compute benefits as a 1.5 percent of earnings over the private sector. Another 21 fixed percent of terminal earnings $25,000 x years of service percent of public sector participants Compensation and Working Conditions Summer 1997 38 Table 1. Requirements for normal retirement, full-time employees, by establishment type, 1993-94 Medium and State and Medium and State and Requirement large private local Requirement large private local establishments governments establishments governments Percent Percent Total with normal Service requirement retirement provision ...................... 100 100 15 years ...................................... (1) - Younger than age 55 ..................... ( 1) 1 Age 62 ........................................... 21 6 No service requirement ............... - (1) No service requirement ............... 3 (1) Service requirement Service requirement 5 years ........................................ - (1) 5 years ........................................ 5 (1) 20 years ...................................... - (1) 10 years ...................................... 7 5 25 years ...................................... - (1) 15 years ...................................... 1 (1) 30 years ...................................... (1) (1) 20 years ...................................... 2 - More than 30 years 21-24 years ................................. (1) - 25 years ...................................... 1 (1) Age 55 ........................................... 4 21 30 years ...................................... 1 (1) No service requirement
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