Trends in Public Sector Pensions

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Trends in Public Sector Pensions

• Kelly Haverstick
• Research Economist,
• Center for Retirement Research at Boston College
• Meeting of the Special Legislative Commission on
• the State Pension and Retirement System
• Providence, RI
• April 30, 2008

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State and local pension assets account for 22
percent of total assets.

Retirement Plan Assets, 2006
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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But, the state and local sector has twice as many
assets per worker as the private sector.

Pension Assets per Worker, by Sector, 2006
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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One reason is that state and local workers are
more likely to have pension coverage.

Percent of All Workers Aged 25-64 with Pension
Coverage, by Sector, 2006
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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And since more state and local workers do not
have Social Security coverage

Percent of Workers Covered by Social Security, by
Sector, 2006
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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And the state and local sector relies more
heavily on defined benefit plans.

Percent of Workers Covered by a Pension, by
Pension Type and Sector, 2004
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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in the defined benefit arena, public plans have
higher benefit levels than private plans.

Median Accrual Rates in Defined Benefit Plans, by
Sector, 2006
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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And public plans provide COLAs.

Percent of Workers with Defined Benefit Pensions
Covered by Cost-of-Living Adjustments, by Sector,
2005
Source Alicia H. Munnell and Mauricio Soto. 200
7. State and Local Pensions Are Different from
Private Plans. State and Local Pension Plans
Brief 1. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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Differences in plans reflect the fact that public
employees are more risk averse and unionized
Median Coefficient of Risk Aversion, by Sector,
1996
Percent in Unions, Wage and Salary Workers Ages
25-64, by Sector, 1962-2006
More risk averse
Less risk averse
Source Alicia H. Munnell, Kelly Haverstick, and
Mauricio Soto. 2007. Why Have Defined Benefit
Plans Survived in the Public Sector? State and
Local Pension Plans Brief 2. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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that employers are perpetual entities and need a
stable workforce
Median Years of Tenure of Wage and Salary Workers
Ages 25-64, by Sector, 1973-2004
Four-Year Survival Rates for State and Local
Governments and for New Firms, 1998Q2
Years
Sources Amy E. Knaup. 2005. Survival and
Longevity in the Business Employment Dynamics
Data. Monthly Labor Review 128(5) 50-56 and
Alicia H. Munnell, Kelly Haverstick, and Mauricio
Soto. 2007. Why Have Defined Benefit Plans
Survived in the Public Sector? State and Local
Pension Plans Brief 2. Chestnut Hill, MA Center
for Retirement Research at Boston College.
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and that regulatory differences make public
sector defined benefit plans less costly.
Employer Contributions to Defined Benefit Plans,
by Sector, Billions, 1993-2006
120
90
60
30

Source Alicia H. Munnell, Kelly Haverstick, and
Mauricio Soto. 2007. Why Have Defined Benefit
Plans Survived in the Public Sector? State and
Local Pension Plans Brief 2. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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Defined contribution initiatives among states
have been modest to date.
Adoption of Defined Contribution Plans, by State,
2007
Sources Various retirement systems annual repo
rts and websites of state legislatures.
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Public and private plans perform comparably,
adjusting for size and equity holdings.
Effect on the Real Rate of Return, 1994-2004
Medium size plan
Statistically significant
Large size plan
Not statistically significant
Percent of assets in equities
State plan
Local plan
Constant
Source Alicia H. Munnell, Kelly Haverstick,
Mauricio Soto, and Jean-Pierre Aubry. 2008. What
Do We Know About the Universe of State and Local
Plans? State and Local Plans Brief 4. Chestnut
Hill, MA Center for Retirement Research at
Boston College.
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Public plans are also comparably funded...
Funding Ratios of Pension Funds, State/Local and
Private Sector
Source Alicia H. Munnell, Kelly Haverstick,
Steven Sass, and Jean-Pierre Aubry. 2008. The
Miracle of Funding by State and Local Plans
State and Local Plans Brief 5. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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despite the fact that they use a more rigorous
yardstick.
Accrued Liability by Method, By Year
Cost/Liability by Actuarial Cost Method, By Year
Source Alicia H. Munnell, Kelly Haverstick,
Steven Sass, and Jean-Pierre Aubry. 2008. The
Miracle of Funding by State and Local Plans
State and Local Plans Brief 5. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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The public-private comparison is fair because
they both use the same spread.
Spread for Defined Benefit Plans, by Sector,
1996-2006
Source Alicia H. Munnell and Mauricio Soto.
2007. State and Local Pensions Are Different
from Private Plans. State and Local Pension
Plans Brief 1. Chestnut Hill, MA Center for
Retirement Research at Boston College.
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All is not perfect many plans are still poorly
funded.
Distribution of Funding Ratios for Public Plans,
2006
Source Alicia H. Munnell, Kelly Haverstick,
Steven Sass, and Jean-Pierre Aubry. 2008. The
Miracle of Funding by State and Local Plans
State and Local Plans Brief 5. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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The size of the plan matters larger plans are
better funded.
Average Assets of State and Local Plans by
Funding Ratio (Billions of Dollars)
Source Alicia H. Munnell, Kelly Haverstick, and
Jean-Pierre Aubry. 2008 (forthcoming). Why Does
Funding Status Vary Among State and Local Plans?
State and Local Plans Brief 6. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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But it is still important to fully understand why
some plans are poorly funded.
Effect on the Funding Ratio of State and Local
Pension Plans, 2006
Years of funding
Use PUC method
Made ARC
Employees/retirees on board
Statistically significant
Separate investment council
Not statistically significant
Large plan
Teachers in plan
State-administered plan
State debt to GSP
Source Alicia H. Munnell, Kelly Haverstick, and
Jean-Pierre Aubry. 2008 (forthcoming). Why Does
Funding Status Vary Among State and Local Plans?
State and Local Plans Brief 6. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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Funding only provides a snapshot. We also care
about whether plans make required contributions.
Distribution of State and Local Plans, by
Percentage of ARC Paid, 2006
Source Alicia H. Munnell, Kelly Haverstick,
Steven Sass, and Jean-Pierre Aubry. 2008. The
Miracle of Funding by State and Local Plans
State and Local Plans Brief 5. Chestnut Hill, MA
Center for Retirement Research at Boston College.
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Some plans do not make their ARC because they are
legally constrained.
Legal Constraints
Source Alicia H. Munnell, Kelly Haverstick, and
Jean-Pierre Aubry. 2008 (forthcoming). Why Dont
Some States and Localities Pay their Required
Pension Contributions? State and Local Plans
Brief 7. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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Others do not make their ARC for a variety of
reasons.
Effect on the Probability of Not Making the ARC,
2006
Years of funding
Use PUC method
Active participants
Statistically significant
Retired participants
Not statistically significant
Large plan
State-administered plan
Employee contribution
State debt to GSP
Source Alicia H. Munnell, Kelly Haverstick, and
Jean-Pierre Aubry. 2008 (forthcoming). Why Dont
Some States and Localities Pay their Required
Pension Contributions? State and Local Plans
Brief 7. Chestnut Hill, MA Center for Retirement
Research at Boston College.
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Conclusion

• State-local and private plans differ due to
  characteristics of the employees, the employers,
  and the regulatory environment.Few state-local
  plans have introduced defined contribution
  components.State-local plans are about as well
  funded as their private sector counterparts and
  earn similar investment returns.Plans tend to
  be better funded if they are large, disciplined,
  have an investment council, and enjoy a healthy
  fiscal climate.Some plans which fail to make
  required contributions face legal constraints
  other fall short for a variety of reasons.

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