by Curtis Shelton
Note: Curtis Shelton is a policy research fellow for the Oklahoma Council of Public Affairs (OCPA), the Sooner State’s largest public policy research group, which is based in Oklahoma City.
OCPA recently highlighted how generous government pensions can be for high-level officials like superintendents. While most government employees will not receive an annual six-figure pension, their payouts are still generous when compared to private-sector 401(k) plans. .
Using data from Vanguard’s 2018 annual report, How America Saves and OCPA’s Oklahoma Public Employees Retirement System (OPERS) data tool (http://www.ocpathink.org/tools/oklahoma-public-employees-pension-system), we can compare these retirement programs.
The most basic difference between pensions and 401(k) plans is that pensions are a promised future benefit, whereas 401(k) and similar plans are accounts owned by individual employees. Pensions are described as “defined benefit” (DB) plans because the promised future payout is not based on contributions. On the other hand, 401(k) plans are described as “defined contribution” (DC) plans because the payout at the end is based on contributions (and the growth of investments).
Starting with employee and employer contribution rates (measured as a percentage of the employee’s salary), you find significant differences between DC plans and the OPERS plan. According to the Vanguard analysis, the average DC employee deferral rate was 6.8% with an aggregate participant and employer contribution rate of 10.3%. The contribution rates for the OPERS plan must equal 20%. State employees have a contribution rate of 3.5%, which means the state contributes at a rate of 16.5%. Local government employees contribute between 3.5-8.5% and the employer then matches whatever the difference is to reach a combined 20% contribution rate.
What do these numbers mean? Employer contributions to a retirement plan are in addition to an employee’s take-home pay. An employee’s total compensation includes these retirement contributions. In the case of state employees, they receive an additional 16.5% of their salary in contributions from taxpayers to their pensions. Private sector workers, on average, contribute more of their own money and receive 3.5% in additional contributions from their employers.
The Vanguard analysis provides median account balances in DC plans for specific age ranges. This allows for a comparison with the median potential benefit estimated for OPERS retirees based on annual payments and expected lifespan. The median account balance for those at the ages of 55-64 with a DC plan is $71,105. The median potential benefit for OPERS retirees is $190,331. A pension calculator created by The Manhattan Institute allows for a comparison between DB benefits and private retirement accounts. Using 62 as the target retirement age (the normal retirement age for OPERS members), 21 years of service (the average years of service according to the OCPA data tool), and $45,000 as the final average salary, the pension calculator shows the average private-sector worker would need $323,200 at the same retirement age to have the equivalent annual benefit of a public-sector employee on a DB plan.
While these benefits are generous, this analysis is not meant to imply that public-sector employees are rich. While most public sector salaries are less than those in the private sector, just looking at wages does not tell the whole story. As a new report from the American Enterprise Institute shows, almost none of the media coverage on the recent teacher strikes mentioned pensions or other benefits when discussing teacher compensation. You need only look at Illinois to know that these benefits can have a severe impact on state budgets.
Oklahoma taxpayers paid more than $1.2 billion into public pension programs in fiscal year 2017. In all, Oklahoma public pension programs received $1.7 billion in contributions, with $443 million coming from employee contributions. Oklahoma legislators have done a good job ensuring these pension liabilities are adequately funded. According to a Tax Foundation report Oklahoma’s public pensions had a funding ratio of 72% in fiscal year 2016. This ranked Oklahoma 20th among all 50 states. Having a clear and full picture of public employee compensation is important when debating government employee pay and the tax burden on Oklahomans.
NOTE: Shelton write frequently for the Oklahoma Council of Public Affairs. This essay appeared previously at the OCPA website, and is re-posted here with permission. The report looking at generous pension plans for state superintendents was posted last weekend, and can be read here.