Market losses incurred in the early weeks of the COVID-19 crisis have largely been offset by more recent rebounds, but increases in market volatility and uncertainty resulting from the pandemic have prompted concern over the investment portfolios of many individuals and institutions. This includes public retirement systems and their millions of members who rely on investment returns to pay for about 60% of benefits.
In the public sector, retirement benefits have helped state and local governments attract and retain a skilled workforce that is now at the forefront of efforts to protect public health and safety during the crisis. Employees point to this part of their compensation as a crucial factor in their decision to join and remain in public service.
But as demographics and employment preferences shift, how well do these cherished benefits help retirees maintain a dignified quality of life? Recent research from The Pew Charitable Trusts analyzes three metrics that help governments evaluate how much retirement security their plans provide:
- Replacement income.
- Retirement savings rate.
- Value of lifetime benefits.
Replacement income is the metric traditionally used to assess how well workers are set up for retirement. It reflects the percentage of a worker’s pre-retirement income that a pension plan pays out.
When Social Security payments are factored in with state or local plan benefits, Pew’s analysis found that career government workers in most state and teacher pension systems that participate in Social Security can expect their retirement benefits to match their final take-home pay. (Roughly one-fourth of state and local government employees participate in a public retirement system in place of Social Security.)
But what about government workers who separate early or midcareer? Many of these workers will withdraw their contributions when they leave their jobs as opposed to taking a benefit at retirement. The replacement ratio will not provide an adequate metric of retirement security for these workers. In addition, focusing only on the replacement ratio may ignore individual circumstances, including health care benefits and expenses.
For these reasons, Pew uses a second indicator of retirement security, the retirement savings rate, to assess how well workers who change employers over the course of their careers will fare in retirement.
This metric captures the percentage of a worker’s annual salary that can be withdrawn when leaving a job. It varies, depending in part on whether employees can take their employer contributions in addition to their own and how much interest has accrued on these contributions. For noncareer government workers, only a handful states report savings rates greater than 10%, suggesting that many states may be falling short on retirement security for noncareer workers.
A third metric, value of lifetime benefits, measures the total amount of government-sponsored retirement income an employee can expect to receive over a lifetime. Developed by the Urban Institute, the value of lifetime benefits includes many variables, such as plan design and employees’ years of service, age at hiring and date of retirement or separation.
New research indicates that public plans may face significant challenges in response to the pandemic-fueled downturn. Now, as falling revenue projections wreak havoc on state budgets and the virus continues to cause dislocations in the private- and public-sector labor markets, governments have an even greater reason to evaluate how well their pension plans promote retirement security and other workforce goals.
Anna Petrini is a senior policy specialist in NCSL’s Employment, Labor and Retirement Program.