Government Spending

The 90 Percent Who Work in Private Sector Should Read This About Public Sector Pension Reform

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The state of Ohio is finally getting around to what the Dayton Daily News a "drastic pension overhaul."

But the real takeaway from the story, in my opinion anway, is just how different public and private sector pension benefits are. Consider the "sweeping changes" to defined-benefit plans:

…The bills would require active teachers to contribute 14 percent of their pretax income to the retirement plan, up from the current 10 percent….

…some teachers are frustrated by a proposal that would push retirement eligibility back at least five years, to age 60 after 35 years of service…

…police and fire employees would have to contribute more money to their retirement, with the increase from 10 percent to 12.25 percent phased in during three years….

…changes in how officers' final average salary will be calculated for pension purposes are significant, as is the eventual increase in retirement age from 48 to 52….

You got that? Teachers and public safety folks in Ohio, who don't pay into Social Security by the way, wouldn't be able to tap into their full pensions until 60 and 52 years of ag

e. The state currently contributes about 14 percent of their salaries for retirement too; it's unclear from the story whether employee increases would minimize state contributions but I'm assuming they would.

For most uses, private-sector folks can't access 401(k) or 403(b) funds until just shy of 60 years. And the typical employer match, when it's there at all, is 50 percent of the employee's contribution. Needless to say, defined contribution plans don't guarantee retirement outcomes, either. 

Contrary to claims, public-sector workers do not make less than their private-sector counterparts in Ohio. Generally, they make significantly more than comparable private-sector drones in straight salary. When you factor in benefits, they make 34 percent more than private-sector comps. In nearby Michigan, public sector workers make 47 percent more in total compensation than similar private sector ones. For federal workers, the spread is 45 percent in total comp. And for the thousandth time: This is comparing similar workers. 

The Dayton Daily News reports that 41 states have made major pension reforms in the past two years. But until they put the kibosh on defined-benefit plans altogether, don't expect to see the sorts of major savings that will take the pressure off the private sector to pay for public sector benefits.