Federal, State, and Local Public Retirement Plans

Background

Federal, state, and local government retirement plans are usually defined-benefit ( DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. ) pensions with benefits based on an employee’s salary in the years just before retirement. These are known as final-salary plans. However, there is a wide variety in the way government employee plans are structured and how workers qualify for benefits. These plans are not usually covered by the federal Employee Retirement Income Security ActThe Employee Retirement Income Security Act sets minimum standards for pension and welfare plans in the private sector. Private employers must meet these standards for their plans to be eligible for tax-favored status. , and requirements of that law do not apply to them.

Several states and the federal government offer defined-contribution ( DCDefined contribution (DC) is a type of retirement savings plan in which employee and sometimes employers make contributions. Retirement benefit amounts depend on account accumulations over time. ) retirement savings plans. They are either as a complement to the traditional pension or as part of a reform intended to phase out the DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. benefit. In addition, some jurisdictions offer hybrid plans such as cash balance plans that have characteristics of both DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. and DCDefined contribution (DC) is a type of retirement savings plan in which employee and sometimes employers make contributions. Retirement benefit amounts depend on account accumulations over time. plans. Hybrid plans usually are based on contributions from the employer, employee, or both that grow at a pre-set rate regardless of how the money is invested. Upon retirement, several things can happen. Using a predetermined formula, the fund can be converted into a pension, it can be used to purchase an annuity A contract that provides fixed payments for a lifetime or a specified number of years, usually after retirement. , or it can be taken as a lump sum.

FEDERAL, STATE, AND LOCAL RETIREMENT PLANS: Policy

FEDERAL, STATE, AND LOCAL RETIREMENT PLANS: Policy

Type of plan and conversions

Government workers should continue to have access to defined-benefit ( DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. ) plans.

Changes to retirement plans

Modifications to retirement plans or plan formulas should hold harmless current beneficiaries and employees. They should also ensure the retirement security needs of future retirees.

Any modifications should be fiscally responsible, ensure the long-term viability of existing plans, and protect the retirement security of workers. This is especially important for those who are vested or who are close to retirement.

Changes to DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. plans should not discriminate against older workers and should maintain important benefit protections.

Retirement funds holding assets exceeding obligations to active employees should consider improving benefits for retirees and their spouses. They should initiate or expand health and life insurance coverage for retirees. Plans should give special consideration to the financial needs of those who have been retired longest and whose benefits are likely to have suffered significant erosion of purchasing power.

State and local retirement systems should avoid making long-term benefit enhancements with short-term budgetary surpluses. They should address plan design features that allow end-of-career enhancements that negatively affect the long-term health of the plan.

Plan features

Public retirement systems should establish a maximum vesting period of five years for DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. plans and one year for employers’ matching contributions to defined-contribution or hybrid plans.

Public retirement systems should provide prefunded, annual, automatic, and full cost-of-living adjustments based on an accurate inflation index.

Employee benefits applied to full-time federal, state, and local government workers should be available to part-time workers on a prorated basis.

States and localities should improve intrastate and interstate portability of public employees’ service credits. This should be subject to the financial integrity of each system (see this chapter’s section on Integration of Retirement Plans with Social Security for information about pension integration with Social Security).

Reporting and disclosure

States and localities should improve reporting and disclosure to plan participants. Specifically, states and localities should:

  • encourage pension disclosures that are straightforward and understandable for participants, beneficiaries, and taxpayers;
  • examine the feasibility of improving the fiduciary reporting and disclosure standards of their plans as a first step in strengthening their soundness; and
  • regularly report to a central government review agency reliable and consistent information on the nation’s public employees’ retirement system obligations.

States should carefully monitor the reporting, disclosure, and funding practices of local public retirement systems under their jurisdiction and, where appropriate, administer the plans on behalf of local governments.

Public employees' retirement systems should educate their employees about what their retirement income is likely to be. They should provide information from their public retirement plans as well as from Social Security. 

State and local retirement systems should include active workers and retirees on their investment boards to enhance disclosure and expand participation in decision-making.

Financing

States and localities should move toward full funding of their retirement systems.

Policymakers should consider the short- and long-term costs of benefit improvements and enact such improvements only if accompanied by clearly spelled-out funding plans.

States should make full contributions to retirement plans, as actuarially determined, and avoid taking funding holidays.

Retirees should have priority in bankruptcy, for example, in state insolvency or receivership proceedings involving municipal entities, state agencies, and instrumentalities. They should receive all or a part of earned retirement benefits in such proceedings: at least enough to ensure that their basic needs can be met.

Cash balance plans

States should ensure that cash balance and other hybrid plans do not discriminate against older workers. These plans should maintain important benefit protections of DBDefined benefit (DB) is a type of retirement savings plan in which the benefit amount depends on a formula that includes such factors as the employee's pay, years of employment, and age. plans.

States and localities should require that in a plan conversion, employers provide each affected individual with a personalized benefits statement. The statement must compare the projected benefits under the old and new plans. Such information must be shown in a comparable form. For example, life annuity A contract that provides fixed payments for a lifetime or a specified number of years, usually after retirement. compared with life annuity A contract that provides fixed payments for a lifetime or a specified number of years, usually after retirement. . It should be provided well in advance of the effective date of any plan change.