State and local pensions have experienced many changes since the Great Recession.

Worried about high costs and a deteriorating fiscal situation, lawmakers in dozens of states have enacted a series of reforms to reduce promised benefits for current and future workers. Many of these benefit reductions have fallen on workers who are not covered by Social Security.

These workers do not enjoy the same portability of retirement benefits as workers who are covered by Social Security when they change jobs, making them more dependent on the retirement benefits provided by their employer.   

Which workers aren’t covered by Social Security?

Currently, roughly 6 million (PDF) state and local government workers are not covered by Social Security, including many teachers, firefighters, and police officers. Like most state and local workers, noncovered workers usually participate in defined benefit (DB) pension plans offered by their government employer.

In DB plans, a formula defines the amount of the benefit that a worker should receive at retirement. The benefit formula usually depends on salary and years of service.

The most common version of the formula is the product of the following three quantities: the multiplier rate, the worker’s years of service, and the worker’s final average salary. The multiplier rate is a constant percentage usually set by state law; typical values hover around 2 percent. Per the formula, more years of work and higher late-career salaries can substantially boost the benefit.

Other rules and provisions can also affect the size of the benefit, such as retirement eligibility conditions. For example, some firefighters may become eligible for early retirement at age 55 with 25 years of service. Others might have to wait until age 60 with 20 years of service. The eligibility conditions vary by plan.

Analyzing changes to public pension plans provisions

To understand how state and local pension plans have changed for noncovered workers, we used data from the Urban Institute’s State and Local Employee Pension Plan Database to compare plans offered to noncovered workers hired in 2008 with those offered to new hires in 2018.

Our analysis finds a common story, whether looking at teachers, firefighters, or police officers: new hires in 2018 faced more stringent plan rules that will end up reducing their retirement benefits relative to workers hired in 2008.

We find that the amount an employee must contribute toward their own plan increased by an average of about 8 percent, the time required to vest for benefits increased by 8 percent, and final average salary periods increased by about 17 percent. On average, multiplier rates decreased 2 percent. Collectively, these changes would substantially reduce promised pension benefits for new hires in 2018.

We also looked at how noncovered workers compared with all state and local workers—both covered and noncovered. Although both groups experienced tightening plan rules that would reduce benefits, the changes were slightly smaller for workers not covered by Social Security.

This difference is not yet fully understood, but it suggests that state and local government employers may have taken Social Security coverage into account.

Retirement security loophole

By law, workers not covered by Social Security must be covered by an employer-sponsored plan that provides benefits that are at least equivalent to Social Security. However, research has suggested that even though many of these plans comply with the letter of the law, as detailed in regulation, they do not provide equivalent benefits when a more comprehensive test is used to compare benefits.

A 2018 paper from Boston College showed that many noncovered plans are failing (PDF) to provide lifetime benefits that are actually equivalent to Social Security. A recent analysis of teacher pension plans by Chad Aldeman also shows that many short-term teachers who lack coverage would receive pension benefits that fall short of what they could have gotten under Social Security.

In addition, an earlier Urban analysis shows that, in roughly half of the DB plans administered by state and local governments, workers must spend at least 20 years on the job before the value of their pension exceeds the value of their contributions into the system.

Policymakers concerned with ensuring retirement security for all workers could consider revising the regulations that establish the public pension plan safe harbor to make it more comprehensive. They could also consider legislation to make Social Security truly universal. Both approaches would entail transition costs for state and local government budgets.