Retirement Blog

Finance Blogs » Retirement Blog » Are public pensions too rich?

Are public pensions too rich?

By Jennie L. Phipps ·
Tuesday, May 6, 2014
Posted: 3 pm ET

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.

What a deal.retirement-blog-pensions-are-a-promise-shirt

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.

Bankrate wants to hear from you and encourages comments. We ask that you stay on topic, respect other people's opinions, and avoid profanity, offensive statements, and illegal content. Please keep in mind that we reserve the right to (but are not obligated to) edit or delete your comments. Please avoid posting private or confidential information, and also keep in mind that anything you post may be disclosed, published, transmitted or reused.

By submitting a post, you agree to be bound by Bankrate's terms of use. Please refer to Bankrate's privacy policy for more information regarding Bankrate's privacy practices.
May 08, 2014 at 12:44 pm

Mr. Kennedy: No need for "They're the laziest and least efficient workers in the country." You obviously made a poor choice in life and are bemoaning all civil servants. Stick to solutions on pension reform and quit your "pension envy" guilt tripping........

Wayne Groesbeck
May 08, 2014 at 12:38 pm

I receive a State of Michigan pension for 22 years of employment. We got pensions instead of raises because pensions come out of a pension fund, rather than the state general fund. Period.

Sean Kennedy
May 08, 2014 at 12:37 pm

Private business in the US has taken a long, 40 year slide because American Consumers have always wanted to buy more stuff for less, even at the cost of off-shoring US Jobs.
The Public Sector has always enjoyed guaranteed employment, tenure-for-all, since no threatened public workers ever seem to get axed (well, prior to 5 years ago).
Public pensions are under-funded and will never be paid. In CT, there are MORE public-sector folks than private-sector folks. Just tax municiple workers to fill their own pension buckets. They're the laziest and least efficient workers in the country.

May 08, 2014 at 12:35 pm

Dennis - maybe your pension was only 40% of your last salary, but I can promise you that is much lower than most school districts. My brother in law was in the neighborhood of 75%. The other issue is police and other public sector unions that allow for overtime to be included in their pension calculations. Some of these guys load up the last few years in order to really boost retirement income from their pension. There needs to be some common sense involved in ALL public sector pensions. I was downsized from a private sector job and was fortunate enough to find a local government position. We get 7.5% of our regular (not ot) salary that we choose how it is invested. Not going to make us rich, but certainly fair to the taxpayers that fund our salaries.

May 08, 2014 at 12:16 pm

Blog administrator: What, are you screening the chatter?

May 08, 2014 at 11:52 am

Nancy: Good one!

Nancy Adams
May 08, 2014 at 11:43 am

The ONLY reason "reforms" are being discussed is because private industry got rid of defined benefit plans to increase the bonuses for the executives with their "golden parachutes" and are nervous that the still extant state pensions make their selfish moves "look bad." They WERE bad.
I put in 40 years in the same job are, paying in 6% to the pension fund, matched by my employer, and the state investment board did very well with my money. I also paid into Social Security for those same 40 years (plus the years before my job as a teacher). And you have cause to make it sound as if we're getting "free money"?
Free money describes "Corporate Welfare" gifts from Congress that they did NOT pay into, building up an individual account.
Yes, retired people NOT in poverty make corporate practices "look bad" because they ARE.

May 08, 2014 at 11:20 am

Dennis: Thank you. Any of us who are public employees (currently or retired) really need not try to defend ourselves with our pensions. You will never satisfy all of these whiners. They need to get real with the life that they have chosen. Get to pension reform talk, you whiners, and stop the personal attacks on government employees.

May 08, 2014 at 11:17 am

The national debt is currently at $17 trillion. I predict that Congress raises the cap until it makes it to $22 trillion and then the brakes go on. Can't tax our way out of this so spending cuts are inevitable. Military, public services and welfare for the at or below the poverty level sector will be fairly safe. Given the choice between social security retirement entitlements and public pensions which, are considered a supplement to social security, guess which will be cut first. I suspect the latter.

May 08, 2014 at 11:11 am

Chris regarding teachers pension. I, as a techer of 38 years would love a pension of $5000.00 per month. The actual pension amount is roughly 40% of what your salary was at the time of retirement. Teacher salaries are not 6 figures!