Public Pensions vs. Private Pensions

by Tim Plaehn
Benefits such as retirement plans are important to job seekers.

Public pensions are the retirement plans for those who work in state and local governments. These workers include law enforcement officers and firefighters. Employees who work for companies are covered by private pension plans, although not all companies offer such plans. For someone entering the workforce, the type of retirement plan an employer provides could affect the choice of where to go to work.

Weighing the Future

Retirement plans can be divided into the two groups: defined benefit and defined contribution. With a defined benefit plan, the size of your retirement check will come from a formula based on your salary earned while working and your number of years on the job. With this type of plan, you'll knows exactly how much money you'll receive every month. In a defined contribution plan, money is deposited into your retirement account every year and how much you'll have at retirement depends on the size of the deposits and the returns earned in the stock and bond markets. There are no retirement income guarantees with a defined contribution plan. Public pensions are typically defined benefit plans; private pensions have largely shifted to the defined contribution variety.

Comparing Benefits at Retirement

A 2011 study by Capitol Matrix Consulting for the California Foundation for Fiscal Responsibility found that, on average, the retirement benefits of public employees may be worth more than what private company workers receive when they retire. Public pensions offer benefits that don't exist or are rare in the private sector, such as early retirement with a full pension, coverage for a surviving spouse, and a continuation of medical insurance benefits. In many cases, public employees contribute little or nothing out of their own salaries toward their retirement benefits. The public employer contributions for the pension plans are invested by plan trustees into the stock and bond markets.

Playing the Markets

According to a 2011 article by the Employee Benefit Research Institute, more than 85 percent of the retirement savings plans in the private sector involve salary deferrals and employer matching funds into 401(k) or similar types of plans. In this type of plan, the money is invested in stock and bond funds and allowed to grow tax-free until retirement. How much you'll have at retirement depends on how much of your own salary you set aside and how well the investment markets have performed. One benefit of 401(k) type of savings plans is the ease of moving retirement savings when you change employers.

Funding the Public Plans

While the money in private pension plans is protected by a range of laws, the cash to pay public pension benefits isn't covered by the same legal requirements. Elected officials should be setting aside a portion of tax receipts to invest and grow to pay for future pension obligations. However, politicians sometimes don't set aside the calculated amounts to adequately fund public pension promises. A 2013 review of state public pensions by the nonprofit State Budget Solutions organization calculated that across the U.S., plans were underfunded by about two-thirds of the assets needed. At some point, public pension will require a bigger piece of the tax pie or benefits will be reduced.

About the Author

Tim Plaehn has been writing financial, investment and trading articles and blogs since 2007. His work has appeared online at Seeking Alpha, Marketwatch.com and various other websites. Plaehn has a bachelor's degree in mathematics from the U.S. Air Force Academy.

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