Economics, Entitlements

Federal employee pensions: a good deal?

Image Credit: Shutterstock

Image Credit: Shutterstock

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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2 thoughts on “Federal employee pensions: a good deal?

  1. Federal pensions are essentially promises by this Congress that some future Congress will pay them. As we all know, one Congress cannot really bind another.
    But no matter, we had been saying we imagine things were going to be tough years from now, let’s solve that problem by imagining things won’t be so bad. I’m OK with that.
    But the thing that should be done is raise the current salaries by the future value of the pension and let the workers deal with the issue.
    Federal workers are paid more than average Joes because the Feds are more highly educated, at least that is the claim. Let’s put their brain power to work.
    Give them the dough now, watch what they or their unions do with it, and then us lesser mortals can adopt the same best practices.
    We’d all be better off.

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