Bridging the gap between public and private pensions

The United States private sector retirement system could adopt some particular elements of the public sector retirement system to bring the differences between the two back into balance, according to NASRA research director, Keith Brainard.Brainard listed the pooling of assets, the professional investment of assets and the required participation as some of the attributes that the private sector needs to emulate.

At a presentation at the Teacher Retirement System of Texas (TRS) February board meeting, Brainard outlined the differences between pension plans for private and public sector employees.

“The contrast in retirement benefit levels between the public sector and the private sector has never been greater,” said Brainard.

“In the private sector, if you do the math between employers that don’t provide any kind of retirement benefit at all and employees who elect to not participate, you realise that barely one half of the private sector workforce is participating in an employer sponsored retirement plan at all.”

The coverage of defined benefit plans or traditional pension plan coverage in the private sector “has diminished over the last generation”, said Brainard, with fewer than one in five private sector employees now able to participate in an employer sponsored pension plan.

These differences cause many policy makers to claim that public employee retirement benefits should be no greater than what is provided to private sector workers, suggesting changes to the public system need to be made.

However, this philosophy can lead to a “race to the bottom”, Brainard said.

“The worst private sector benefit always becomes the one we are pursuing.”

“I think that there are certain attributes of the public sector retirement model that ought to be emulated in the private sector.”

According to the National Association of State Retirement Administrators (NASRA), 12 per cent of the nation’s workforce is employed by state and local governments, which equates to more than 15 million active, working participants, plus 7.5 million retirees and their survivors.

Of this, 85 per cent participate in their employer’s pension plan. This contrasts sharply to the private sector, where one third of the workforce has no access to an employer-sponsored retirement plan.

The differences between pension coverage among private sector employees and those employed in the public system is largely due to federal regulations and accounting standards which do not pertain to the public sector.

Brainard named the 401k plan as the predominant plan across the US outside of the public sector.

While social security participation is nearly universal in the private sector, 25 to 30 per cent of employees of state and local government do not participate in social security. This number includes nearly all TRS participants, about half of all public school teachers in the US and a majority of police officers and fire-fighters.

Brainard said there are seven American states – not including Texas – where the majority of public employees do not participate in social security.

Citing figures produced by the Bureau of Labour Statistics, Brainard said that nearly 90 per cent of state and local government employees have access to a traditional pension plan.

“Typically participation in that plan is mandatory and so roughly 87 per cent of employees of state and local government in the United States are participating in a traditional pension plan.”

Only recently have private sector employers been allowed to automatically enrol employees in a retirement benefit plan, Brainard explained.

This is one aspect of the public system that Brainard says the private sector needs to emulate.

In Texas specifically, defined benefit plans for employees of state and local government the assets total $175 billion and nearly all (95 per cent) of state and local government workers participate in their employer’s traditional pension plan.

“In certain respects, Texas is a microcosm of the national public retirement picture,” Brainard said.

In the state, there are 1.35 million active, working participants and 450,000 retirees and their survivors.

“Texas is impressive in terms of its very broad coverage of defined benefit plans,” he said. “After you get past the state wide plans, of course the major cities offer defined benefit plans and then there are more than 800 municipalities that participate in the Texas municipal retirement system. Every county but one participates in the county and district times’ system plus many special districts. The overall coverage of traditional pension plans in the state of Texas is substantial.”

Out of more than 70 public retirement systems in Texas, TRS, a $95.7 billion fund, accounts for more than one half of all assets and members.

The contribution rates in effect in FY09 for non-Social Security eligible teachers and general employees across the US were 8 per cent for employees and 12.70 per cent for employers. TRS was much lower than the national median, with employees’ contribution rate only 6.40 per cent, and employers on a slightly higher rate of 6.58 per cent.

“TRS is not collecting as much as it should be, on a national basis the average public pension benefit is about $23,000 and so Texas is not too far off that, considering the cost the tax payers and the employers are kicking in,” Brainard said.

Overall, the public pension community is “big”, Brainard said, with funding levels varying widely.

He named Illinois and California as states where public pension funds are in “bad shape”, due to poor funding as a result of a chronic failure to make contributions or given away generous benefit advancements and in some cases not adequately funded them.