What is a pension?

A pension is the strongest and most stable retirement option. Workers earn their pensions by contributing a portion of every paycheck toward their retirement. Their contributions are combined with their employer’s contributions, and then that money is invested. After they retire, the worker receives their pension through a monthly benefit that will last for the rest of their life.

Who gets a public pension?

Many public school teachers, public health care workers, firefighters, public safety officers, sanitation workers, and other state and municipal employees earn a defined benefit pension as part of their compensation during their working years. Many of these workers accept lower pay during their careers in exchange for the promise of a pension in retirement and they contribute a portion of every paycheck toward their pension. In some states, public employees do not receive Social Security, so their pension is their only source of retirement savings.

What is the difference between a pension and a 401(k)?

A defined benefit pension offers a guaranteed payment in retirement for the rest of someone’s life. A defined contribution plan, like a 401(k), does not guarantee a certain amount each month in retirement. Instead, workers are only guaranteed a certain contribution from their employer during their working years–if the employer contributes at all. The worker then receives these contributions as a lump sum when they retire. The worker must decide how to invest this money, unlike in a pension, where the money is collectively pooled and professionally managed.

How are public pension benefits calculated?

Public pension benefits are often calculated based on a formula that takes into account factors such as years of service, final average salary, and a multiplier determined by the pension plan. The formula may differ between plans, but the goal is to provide retirees with a secure and stable life-long income in retirement.

How are public pensions funded?

Funding for public pensions comes from three sources: employee contributions, employer contributions, and investment earnings. Of the three, investment earnings typically make up the majority: more than 70 percent. Historically, state and local government employers have contributed 19.4 percent of pension plan revenues. The remaining 10.6 percent is contributed by public employees, who pay for their pension with every paycheck. 

Why are pensions the best way for working people to prepare for retirement?

A defined benefit pension is a secure and reliable way to prepare for retirement. Earning a defined benefit pension guarantees a monthly payment in retirement for the rest of your life. Pensions are professionally managed and pool risk collectively among all the participants in the plan. Pensions can also balance risk and reward in their investments because they do not depend on any one person’s lifespan. 

Do recipients of public pensions also get Social Security?

In fifteen states, public employees do not contribute to Social Security and, therefore, do not earn Social Security benefits. For these employees, their pension is their only source of retirement income.  In other states, public employees earn both their pension benefits and Social Security benefits through their contributions to both systems.

Can public pension benefits be adjusted?

Public pension benefits are typically governed by state laws or regulations that outline the terms of the pension plan. In some cases, adjustments may be made to address funding shortfalls or changes in economic conditions. However, any modifications to pension benefits are subject to legal constraints and often require careful consideration and negotiation.

What happens to a public pension if an employee changes jobs?

In many cases, public pension benefits are portable, meaning that employees who change jobs within the public sector can often retain their accrued pension benefits or transfer them to a new pension plan. However, the specific rules governing portability may vary depending on the pension system and applicable laws.