Public Pensions Offset Wage Penalty, Help Retain Essential Public Service Workers in Marin County
BERKELEY, CA – A new research brief by the UC Berkeley Labor Center demonstrates how defined benefit (DB) pensions—which provide secure monthly retirement income based on salary and years of service—support a quality public sector workforce in Marin County.
This brief is the first of three in the Marin Public Pension Series, which focuses on the value, cost, and wealth equity impacts of DB pensions for teachers, nurses, firefighters, and other workers who provide essential public services in the county.
“Our research shows that public employees in Marin County are, on average, significantly underpaid in relation to their education, and that public pensions help offset this wage penalty efficiently,” said Nari Rhee, Director of the Retirement Security program at the UC Berkeley Labor Center and author of this brief. “Pensions provide secure retirement income and powerful incentives to keep skilled workers in public service, at about half the cost of a comparable 401(k) benefit. This translates to significant economic value for state and local government employees, their employers, and the public.”
Using Census data, the author found that public employees in Marin are, on average, paid considerably less than private sector employees, even though the public sector workforce as a whole is more educated and experienced. Full-time, year-round public employees earn 8% less than private sector workers on average. When education is taken into account, public employees in Marin earn 17% less on average than their private-sector counterparts.
Given the public sector wage penalty, the retirement income security that the California Public Employees’ Retirement System (CalPERS), the California State Teachers’ Retirement System (CalSTRS), and locally administered public pensions provide plays a crucial role in attracting and retaining a high-quality public sector workforce, more than half of which is employed in education and health services in Marin County.
Public pensions help offset the public sector penalty in a fiscally efficient manner. Pensions deliver more retirement income per dollar of contribution than 401(k)s due to longevity risk pooling as well as higher investment returns from a longer investment horizon, lower fees, and professional investment management. For instance, the author’s analysis of CalSTRS found that it replaces 49% of the final salary of career teachers, who tend to be long-lived and who are not covered by Social Security. Teachers pay about half the cost of currently accrued pension benefits, and the state and school districts pay the other half. A 401(k) receiving the same combined contributions would generate only half that amount, 25% of final salary.
“Our research provides valuable lessons beyond Marin County,” said Rhee. “We know that public pensions attract and retain skilled workers, which contributes to quality public service, including public education.” A prior study by the author found that three-quarters of public school teachers in California will serve at least 20 years, thanks to the retention incentive provided by CalSTRS.
This brief is the first of a three-part series focused on pensions for state and local government workers employed in Marin County. The second brief will address the cost and sustainability of public employee pensions. The final brief will highlight the role of public defined benefit pensions in reducing retirement wealth inequality by race, gender, and income/education compared to 401(k)-style plans.
The UC Berkeley Center for Labor Research and Education (Labor Center) is a public service project of the Institute for Research on Labor and Employment (IRLE) at UC Berkeley.