Public-Sector Employees Shouldering More Risk in Retirement Plans

Many people in the private sector may not realize that for the vast majority of employees of state and local governments, both participation in a public pension plan and contributing toward the cost of the pension are mandatory terms of employment.

In a recent report, the National Association of State Retirement Administrators (NASRA), says since 2009, more than 35 states increased required employee contribution rates. As a result of these changes, the median contribution rate paid by employees has increased to 6% of pay for employees who also participate in Social Security, and has remained steady at 8% for those who do not participate in Social Security.

Contribution requirements for certain employee groups in some states that previously did not require some employees to make pension contributions were established in recent years for newly hired employees, existing workers, or both.

NASRA says a growing number of states are exposing employee contributions to risk. More states maintain plans in which the employee contribution rate may change, depending on the pension plan’s actuarial condition or other factors. NASRA’s report, “In-Depth: Risk-Sharing in Public Retirement Plans,” describes a range of variable employee contribution rate arrangements, including those based on the plan’s actuarial funding level, the plan’s normal cost, and a rate that is tied to a percentage of the employer rate.

In addition, an increasing number of public employees now participate in hybrid retirement plans, which combine elements of defined benefit and defined contribution plans, and that transfer some risk from the employer to the employee. In one type of hybrid plan, known as a combination defined benefit-defined contribution plan, employees in most cases are responsible for contributing all or most of the cost of the defined contribution portion of the plan.

Data compiled by NASRA, based on U.S. Census Bureau data, shows in the period from 1989 to 2018, investment earnings made up 63% of public pension’s sources of revenue, with employer contributions making up 26% and employee contributions 11%.

The report, “Employee Contributions to Public Pension Plans,” may be downloaded from here.