The Myth of the Modest Pension

One of the specious arguments used to thwart pension reform centers on the average benefits of retirees. Opponents of reform claim the “average pension benefit” is around $25,000 annually. But a deeper examination of this figure tells a different story.

The “average” retiree didn’t work in the school system her entire career. And the “average pension” is diminished by employees taking a “lump sum withdrawal” upon retirement. Data from the Public School Employees Retirement System (PSERS) show teachers who worked their entire career in education have a much better retirement plan.

• Q: What is the average pension for a PSERS retiree with 30-34 years of experience?
• A: $38,232
• Q: What is the average pension for a retiree with 35-39 years of experience?
• A: $50,176
• Q: What is the average pension for a retiree with 40 or more of experience?
• A: $53,377

All of these totals are after retirees take their lump sum withdrawal, which is comprised of employee contributions plus interest. If employees opt to withdraw the lump sum, often amounting to several hundred thousand dollars, they then receive a lower annual pension payment. Almost all employees choose this option. 

This withdrawal option (called option 4) is not available for employees hired after 2010. SB1, the current reform pension bill making its way through the General Assembly, would change the Option 4 formula, as it costs taxpayers more for employees who take the lump sum over the higher annual pension. The actuarial note for SB 1 released on Monday shows changing this formula would save an estimated $6.1 billion in pension contributions over 30 years.

This half-truth misleads for another reason—it implies shifting to a defined contribution plan hurts workers. That couldn’t be further from the truth.

As Matt pointed out in his testimony on SB 1, most new teachers will never be vested in their pension. In contrast, a defined contribution plan offers teachers and state workers a predictable, portable and sustainable retirement plan—one which is better for most young workers.

Of course, the most important reason to shift to a defined contribution plan is to get politics out of pensions—and end the cycle of overpromising and underfunding pensions.