Covet thy neighbor’s -- pension? Public vs. private

Some pension matters are easy to compare, like their popularity (or unpopularity, it turns out) with employers. The "traditional" pension is a defined-benefit plan, which comes with the guarantee of a lifetime monthly check, somewhat irrespective of the funding that underlies the promise. Another option for retirement savings is a defined-contribution plan, such as a 401(k). Here, employers and employees make contributions toward the worker's retirement, but there is no guarantee of a defined, predictable monthly annuity check. Building a nest egg for old age is primarily the responsibility of the employee, and therein lies the crucial difference.

The number of private employers offering defined-benefit pensions has dropped precipitously. In 1985, some 112,000 private pension plans were insured by the Pension Benefit Guaranty Corp., the government agency that insures private pension plans. Last year, the number dipped below 30,000. Among all private employers last year, just 11 percent offered defined-benefit pensions, according to the Bureau of Labor Statistics. Because those that do are mostly very large employers, about 21 percent of all private-sector employees are covered by a defined-benefit pension. On the other hand, 53 percent of private-sector workers had access to defined-contribution retirement plans, and 42 percent participated.

On the public side, about 90 percent of 16 million local and state workers are covered by a defined-benefit pension, levels that have changed little of late. For all the media hype about private firms terminating pension plans and adopting 401(k)s, only a few public pensions have taken that step—most notably in Michigan. When public entities do so, however, they don't terminate old plans; rather, they keep the existing plan intact and implement the defined-contribution plan with new employees.

COLAs hit the spot

According to employee compensation figures for last year from the Bureau of Labor Statistics, the percentage dedicated to worker retirement and savings by public employers is almost double that of private employers (6.9 percent vs. 3.7 percent, respectively). It even dwarfs the average federal civilian contribution of 4.3 percent.

Some of the additional spending goes to retirement benefits for more employees. For example, better than 60 percent of part-time local and state workers received pension benefits, according to a 2001 report by the Employee Benefit Research Institute. That's a perk received by few part-timers in the private sector.

Local and state pension plans also incur more retirement expenses due to annual, upward adjustments in pension annuities. For example, about two-thirds of public pensions offer automatic cost-of-living adjustments (COLAs), according to Keith Brainard of the National Association of State Retirement Administrators. Such adjustments can tack on as much as 3 percent every year to public pensions. Most also add adjustments based on investment returns, which typically padded annuities by anywhere from 2 percent to 8 percent in many plans during the roaring 1990s.

Such benefits are rare in the private sector, said Dimitry Mindlin, a managing director with Wilshire Associates, a global investment consulting firm. "I don't believe a single client of ours has [a COLA]."

It appears that most local and state employees can also depend on at least a small health care subsidy in retirement (see related article on GASB 45). That's becoming rare in the private sector. According to a 2005 report by the Kaiser Family Foundation, the share of large private employers (those with 200 or more employees) offering retiree health coverage has dropped from 66 percent in 1988 to 33 percent last year.

The measurement problem

Zeroing in on the relative generosity of private versus public retirement plans is complicated. Indeed, simple popularity starts with an apples-to-oranges comparison: The public sector prefers defined-benefit plans, while private employers typically offer defined-contribution plans, and each has unique characteristics—for example, one permanence, the other portability—that are valued differently by different people.

Even comparing defined-benefit plans in both sectors is difficult, because of things like multipliers, years of services and final average salary—no two plans are alike, and even picking the one that is "average" is difficult. Getting this far only allows a comparison of first-year annuities for private- and public-sector retirees, because starting in year two, COLAs kick in for public pensions—and there are dozens or more COLA variations.

Most pension comparisons also fail to factor in Social Security. It's a little-known fact that roughly one-quarter of local and state workers don't contribute to Social Security (for mostly historical and political reasons), so they don't receive Social Security at retirement. (In the district, the vast majority of public workers pay into Social Security.) Instead, both employer and employee typically make larger contributions toward a worker's final pension to make up for the lack of federal entitlement—a practice that skews any comparisons because all private pensioners receive Social Security.

Another critical factor to consider is employee contributions: In the public sector, employees regularly contribute 5 percent to 7 percent of their salary; in private-sector plans, workers typically contribute nothing.

Also unmeasurable, but critical, in any comparison of traditional pensions is the value of long-term security, as any pensioner in the airline, steel or other struggling private industry might attest. Literally written into law in many cases, benefits for local and state government retirees offer as much security as any wage earner can hope for today.