Since the Great Recession, public discussion of the pensions afforded public employees has escalated. Many of us who work in the private sector feel a little envious when we consider the old-fashioned defined benefit pensions that our friends and neighbors employed in public sector jobs can expect.
A defined benefit pension guarantees a worker an often generous amount of money throughout his or her retirement -- and frequently the amount is adjusted annually for inflation. These pensions are generally paid for by employers and, more recently, workers have also contributed. They're guaranteed by the governments and, ultimately, by taxpayers.
Those of us who work in the private sector where defined benefit pensions have mostly gone the way of the Dodo bird can't help but be envious. As the Manhattan Institute, a nonprofit think tank focused on public policy, says, "Pensions are now one of the most hotly debated topics in public finance, due to their rising costs and generosity relative to what most taxpayers receive."
To help people understand this retirement planning issue better, the Manhattan Institute has devised a calculator that allows anyone to compare pension benefits among states and to their own situation. You just click on a state, select a pension system, plug in the salary and number of years worked and the calculator provides an estimated monthly and annual pension total. It also figures out how much 401(k) savings you'd need to replicate that guaranteed retirement income.
Stephen Eide, a senior fellow at the institute and one of those responsible for devising the calculator, says, "Pensions are a lot of money, and it is a very complicated money."
He explains that this calculator represents only the largest of the public pension systems across the country; there are thousands of smaller ones that operate similarly. He also points out that 70 percent of public pension participants pay into and are eligible to receive Social Security benefits undiminished by the Windfall Elimination Provision, or WEP, or the Government Pension Offset, or GPO.
In many states and municipalities, pension budgetary shortfalls are a hot topic. In bankrupt Detroit, for instance, cuts to promised pensions are almost inevitable. The current tentative agreement requires the state legislature to kick in $350 million in state money. The vote may not go Detroit's way. If there is no approval, then it's back to the negotiating table, with larger cuts to pensions and the sale of the city's art collection hanging in the balance.
"I think that the public is supportive of reform," Eide says. "But it isn't that easy. It isn't just public will. There is a question of what states legally can do. Some of the states with the worst problems -- Illinois and California -- can't do much to adjust their benefits. All they can do legally is just change the rules for people who aren't yet hired."
Do you think pensions for public employees are too generous?
Here's what you can do if your public pension plan is threatened.