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How Reliant are Older Americans on State and Local Government Pensions?

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Abstract

State and local government pension plans cover about 19.5 million participants, and many participants are heavily reliant on these pensions for retirement income. Most of these plans, however, are underfunded. Based on data from the Health and Retirement Study, we examined the lifetime work histories of those observed at ages 67 to 72 in 2004, 2008, or 2014. Seventy-seven percent of single persons and 61 percent of couple households had never worked for state or local (S&L) government. Among those single and couple households who did work for S&L government, we found that they have on average more years of education and more economic resources. Among currently retired and near-retirement households, we compared economic preparation for retirement according to their lifetime employment in the S&L sector, and we examined how economic preparation would be affected if pension benefits were cut. Based on stochastic simulations, which account for uncertainty about length of life and out-of-pocket medical expenditures, we found that economic preparation for retirement among those with S&L government work histories would only be modestly reduced if their pension income were cut. Under a 50 percent cut to all pension income of households with any S&L sector work, only an additional three to four percent of these households would no longer be prepared for retirement. The change is modest because households with S&L employment have better preparation than other households; some of the cuts are paid for by reduced taxes; and the affected households will bequeath less.

Key Findings

  • State and local government pensions cover about 19.5 million participants, and many participants are heavily reliant on these pensions for income in retirement. Most of these plans, however, are underfunded.
  • We quantify how many Americans have had employment in state and local government and the importance of pension income to them. To do so, we assess preparation for retirement among respondents 67 to 72 years of age in the 2004, 2008, and 2014 waves of the Health and Retirement Study.
  • We find that state and local government workers are better prepared for retirement than others, in part because they are better educated, worked longer, and have had higher income than others.
  • We estimate that cutting their pensions by 50 percent could reduce the proportion who are adequately prepared for retirement by three or four percentage points, with effects greatest among those with at least 20 years of experience in this sector.

Citation

Armour, Philip, Michael D. Hurd, and Susann Rohwedder. 2019. “How Reliant are Older Americans on State and Local Government Pensions?” Ann Arbor, MI. University of Michigan Retirement and Disability Research Center (MRDRC) Working Paper; MRDRC WP 2019-399. https://mrdrc.isr.umich.edu/publications/papers/pdf/wp399.pdf

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Project

Paper ID

WP 2019-399

Publication Type

Working Paper

Publication Year

2019