Both President Obama and the Congressional GOP want to raise federal workers’ pension contributions. Employee unions call this unfair. Who’s right? I’ve got a more thorough analysis in the works, but a comparison to Rhode Island’s reformed pension plan tells us something.
Why Rhode Island? Because it’s one of the few states that has a two-tiered pension system similar to the federal government’s. In both places, workers pay into a modest “defined benefit” plan, which offers a fixed retirement benefit equal to 1% of final earnings times the employee’s years of service. (E.g., a worker with 25 years employed would receive a benefit equal to 25% of final pay.) On top, workers have a 401(k)-style “defined contribution” account.
There are two questions: how much do federal and Rhode Island employees pay for their DB plan? And what kind of government contribution do they get to their DC account?
- Federal workers currently pay 0.8% of pay for their DB pension. Rhode Island employees pay 3.75% of pay, which is 4.7 times more for the same benefit.
- Federal employees can receive an employer contribution to their DC pension of up to 5% of pay. Rhode Island workers: 1%.
And guess what: the average private sector worker would love to have a retirement plan like Rhode Island’s.
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