NCPA - National Center for Policy Analysis

Third Millennium Study: Public Employees' Systems Better

October 12, 2000

Economists who studied seven state and local pension plans that operate independently of Social Security found that they offer higher benefits. Together, the seven plans cover one million workers exempted from Social Security.

The plans are the Public Employees Retirement System of Nevada, the Maine State Retirement System, the Ohio Public Employees Retirement System, the Ohio State Teachers' Retirement System, the Colorado Public Employees Retirement System and the Los Angeles City Employees Retirement system.

Like Social Security, the plans include provisions for early retirement, disability and survivor benefits. But the benefits are much higher. For example:

  • A $40,000-a-year worker retiring at 62 would receive a $30,194-a-year pension, nearly twice the $15,804-a-year pension a married worker would receive from Social Security.
  • And an $80,000 worker could retire at 65 with an average pension of $75,803 a year while the same worker would receive only $22,003 from Social Security.
  • In addition, workers could retire as early as 55, something you can't do in Social Security.

Higher-income workers receive higher benefits because private pensions give benefits in direct proportion to income -- and therefore in proportion to the amounts contributed -- whereas the Social Security benefit formula is skewed toward lower-income workers.

For single workers or two-earner households, the average public employee plan studied provides a much higher return on contributions than they could expect from Social Security.

The average total contribution for the public employee plans is 20.93 percent of wages -- 7.98 percent from the employee and 12.95 percent from the employer. While this is significantly higher than the 12.40 percent total for Social Security, the study found the private plans pay retirement benefits more than proportionately higher.

Source: Scott Burns, "Pension Plans Work Outside Social Security," Dallas Morning News, October 8, 2000; William E. Even and David A. Macpherson, "Local Solutions To A National Problem: How Non-FICA State And Municipal Pension Plans Offer Prototypes For Social Security Reform," December 1996 (draft), Third Millennium, 121 Avenue of the Americas, Suite 505, New York, N.Y. 10013, (212) 226-2077.

 

Browse more articles on Tax and Spending Issues