Myths & Facts
MYTH Public employees receive lavish pensions.
FACT The national average for public-pension benefits is $18,500. A pension can provide the difference between a comfortable retirement and relying on public assistance.
MYTH States and localities can't afford pension costs, which are rising fast.
FACT Pensions are less costly for taxpayers than 401(k)s, which opponents of public employees are pushing. The vast majority of pension benefits are covered by employee contributions and investment earnings. In California, for example, investment returns of the California Public Employees' Retirement System, the state's retirement system, pay for 75 percent of retiree pension obligations. The balance comes from employees and taxpayers, with each accounting for approximately 12 percent.
MYTH Everyone gets Social Security benefits, so why do employers need to offer pensions?
FACT Millions of public employees (about 25 percent) do not receive Social Security benefits. Public employers often save money by offering larger pensions to their workers in lieu of Social Security. For them, a pension is their primary source of retirement income.
MYTH It is better to offer 401(k)-style plans and give workers control of their retirement.
FACT Studies show that the average worker lacks the time and expertise to handle his or her retirement planning well. A pension should be something to count on, not gamble with or worry about.
MYTH 401(k) plans get a bigger return and are a better deal than pensions.
FACT Traditional pension plans are professionally managed and invest in real estate and commodities as well as stocks and bonds. Such balanced portfolios — nearly impossible for individuals to set up and manage in 401(k)s — tend to enhance investment returns. Matt Scanlan, managing director of Barclays Global Investors, cited in a 2006 Business Week story, points out that 401(k) and other so-called defined-contribution plans tend to under-perform traditional pension ("defined-benefit") plans by 2 percent to 4 percent a year — a difference the magazine says amounts to hundreds of thousands of dollars to an employee over 30 years. Pension plans also charge significantly lower administrative fees.
MYTH Compared to pensions, 401(k)s save taxpayers money.
FACT Nebraska recently dropped its 401(k)-style plan for its workers because it found that individuals' investment decisions were unwise, resulting in a waste of taxpayer contributions to those plans. A 2005 study by Standard & Poor's found that — as a result of poor investment practices — a switch by public employers to 401(k) plans might lead to "lower pension contribution costs over the medium term, but could end up with higher public assistance costs in the long term."
