Most public pension systems provide a defined benefit employee retirement plan. Defined benefit plans provide members a predetermined annual amount based upon an employee’s period of service and final average salary. Public pension plans are funded by contributions from the employer, the employee and investment income. These sources pooled together establish a pension plan that is financially solvent, cost effective and stable, which helps ensure an adequate standard of living throughout retirement for members.
Public pensions are financially solvent:
Fitch Ratings, a global rating agency that provides independent credit opinions, considers a funded ratio of 70% or higher to be adequate.
Morningstar, an independent investment research provider, establishes a 70% funded ratio threshold or higher as fiscally sound.
Nationwide, public pensions have a funded ratio of 71.5% and continue to work toward full funding.
SDCERA’s 79.0% funded ratio surpasses the national average, Fitch Ratings standard for an adequate funding, and Morningstar's threshold level for a fiscally sound funded ratio.
Public pensions are cost effective:
Less than 4% of state budget expenditures go toward funding pension benefits, according to Defending Public Pensions (ABC News).
Traditional pensions enhance employee recruitment and retention, contributing to lower employee turnover rates and the related costs of increased training and low productivity levels.
Defined benefit plans, such as SDCERA’s, earn higher investment returns and pay lower investment management fees than other 401(k)-style retirement options.
2011 research shows that in 2003 pension plans helped to retain 22,000 teachers and saved $273 million by reducing turnover costs.
Public Pensions are stable retirement options:
Defined benefit pension plans provide employees with secure, regular retirement income following a lifetime of work.
Traditional pension plans help sustain state and local economies by providing steady retirement benefits to members.
The median benefit SDCERA members receive is approximately $2,000 per month.
Defined Benefits vs. Defined Contributions Retirement plans
In contrast to a defined benefit plan, defined contributions and other 401(k)-type plans provide employees with individual investment accounts to which employers and employees contribute a certain amount to the account annually. Employees decide how assets are invested and, at retirement, benefits are paid solely from the contributions and investment earnings that have accumulated in the account. Recently, 401(k)s have demonstrated shortcomings as employees are finding account balances inadequate to provide retirement benefits.
According to Retiring Boomers Find 401(k) Plans Fall Short (The Wall Street Journal), the average household headed by a person aged 60 to 62 with a 401(k) account has less than one-quarter of what is needed to maintain its standard of living in retirement. Just 8% of those approaching retirement have the $636,673 or more in their 401(k)s needed to generate $39,465 a year.
A 2008 Annual Survey of 401(k) Plan Sponsors by Deloitte Consulting (conducted before the market meltdown) found only 13% of employers believed the 401(k) plans they offered would provide retirement security for their workers.
Unlike defined benefit plans, in 401(k) plans the burden of retirement-planning falls to untrained individuals, who lack the time and knowledge to manage an investment portfolio.
According to Why It's Time to Retire the 401(k) (Time), the average 401(k) has a balance of $45,519. Nearly half, 46%, of all 401(k) accounts have less than $10,000.
In the post 2008-2009 economy, public pensions have been the subject of scrutiny as a way to explain budget shortfalls. The main contributor to the current funding challenges facing some public pension funds was the collapse of the housing bubble and the subsequent downturn in the economy and the stock market, not inadequate contributions. Today, public pension plans remain a financially sound and cost effective mechanism for providing retirement benefits.
A number of studies have assumed that pension fund portfolios will earn a return of 4.5% annually; however, neither historical fact nor current data support this assumption.
SDCERA's average rate of return over the past 25 years is 9.4%. Fiscal year 2013 (which closed June 30, 2013) realized returns of 8.3% and fiscal year 2012 returned gains of 6.5%.