On average, pension costs for state and local governments are just shy of 3% of total spending, according to a February brief issued by the National Association of State Retirement Administrators (NASRA). The calculations are based on the most-recent data available from the U.S. Census Bureau.
This figure flies in the face of claims from public pension critics who say pension costs are “bankrupting” state and local budgets, and that public pensions are “unsustainable” as currently configured.
“Pensions are not the state-local budget drain that some claim,” the NASRA brief concludes. In fact, to ensure public pensions remain sustainable, more than 40 states and numerous cities have taken proactive steps to improve the financial condition of their retirement plans while also reducing costs, according to NASRA. These changes have included adjusting employee and employer contribution levels, restructuring benefits, or both.
In New York, funding issues were addressed with the implementation of Tier 5 in January 2010. Savings were achieved through a combination of changes such as greater contributions by members throughout their career, a higher retirement age before they qualify for a full benefit, and a longer period before their pensions vest. The possible addition of a Tier 6 would reduce costs even further by tightening pension benefits and restricting the earnings that could be used in the pension formula. Additionally, employer contribution rates are variable in New York, with rates trending up in recent years to ensure plan stability.
On a nationwide basis, the percent of public funds devoted to pensions has been remarkably stable for more than 30 years. Since 1980, the highest it has been is 4.2% (1985) and its low point was 2.0% (2001). The current percentage of 2.9% trends toward the lower end of the scale.
The NASRA brief concludes: “State and local government pension benefits are paid not from general operating revenues, but from trust funds to which public retirees and their employers contributed while they were working. …On average, public pension programs remain a small part of state and local government spending.”