Retirement is growing more challenging for public sector workers, according to a new report by the National Institute on Retirement Security (NIRS) and Aon, The Real Deal for the Public Sector: Retirement Income Adequacy Among U.S. Public Sector Employees.

This research finds that state and local employees in a typical public defined benefit (DB) pension plan need to save about four to six percent of their salary on their own to ensure adequate retirement income. The report also finds that defined contribution (DC) plans provide less retirement income than DB plans in a typical cost-equivalent conversion for career employees.

The report’s key findings regarding retirement income adequacy are as follows:

  • A “retirement number” is elusive because key factors are individual-based.
  • Retirement is growing more challenging for younger generations serving in state and local government.
  • Employees in the average public sector pension plan need to save about four to six percent of their salary on their own for an adequate retirement.
  • Rising medical costs have younger public employees less prepared for retirement than prior generations.
  • Female public employees are less ready than their male counterparts because of longer life expectancies.

The following are the key findings regarding retirement plan design:

  • DC plans provide less retirement income than DB plans in a typical “cost-equivalent” conversion for career public employees.
  • The average DB public pension plan with a two percent COLA provides employees with adequate retirement income without additional employee savings in the baseline scenario, which assumes Social Security coverage and retiree health care.
  • Not participating in Social Security requires a higher multiplier and higher employee savings for an adequate retirement.
  • Lack of a retiree medical plan increases an employee’s shortfall, requiring an expected additional six percent of pay during an employee’s career to cover the gap.

Aon and NIRS partnered to evaluate retirement income adequacy of public sector retirement plans because few employees know what is needed for an adequate retirement; public sector employees have long thought that the benefits provided would provide an adequate retirement after a full career; and most public sector retirement reform has focused on cost and not factored in retirement adequacy, nor the impact of employees not being able to retire in an orderly fashion.

This research explores different metrics for evaluating retirement income adequacy for state and local government employees. The analytical model is based upon previous Aon research that analyzes retirement adequacy for the private sector in previous The Real Deal reports. This new research takes that model and adapts it to the unique features and characteristics of a typical public sector pension plan. It also considers differences in public sector retirement plan provisions, such as whether a worker is in a DB or DC plan, and whether or not they participate in Social Security.