Industry News

In March 2021, the Social Security Administration (SSA) released its article, Vesting Requirements and Key Benefit-Formula Features of State and Local Government Pension Plans. Generally, state and local governments provide pensions to their employees instead of or along with Social Security coverage. The SSA analysis focuses on public pensions in states that represent large numbers of noncovered public sector workers.

Since the Great Recession and other events have adversely affected some state and local budgets, various design parameters have been presented in their approaches to pension reform intended to lower benefits and strengthen funding levels. Using data from fund financial reports and independent research center databases for the period from 2016 to 2019, the article examines three key components of standard pension benefit formulas that have been included in pension reforms, specifically: 1) vesting periods; 2) final-average-salary (FAS) computation periods; and 3) benefit multipliers.

This is the first SSA analysis to study those characteristics at the level of individual benefit tiers in state and local pension systems, as well as to weight the statistics by the number of active members within each tier. The results are shown for tiers categorized by Social Security coverage status, worker occupation group, and whether the tier is open or closed to new hires.

The article concludes that the findings, “provide supporting evidence of a benefit retrenchment across state and local pensions, at least in states where noncovered employment is most common. Benefit tiers that are not open to new hires tend to have shorter vesting periods, shorter FAS periods (resulting in higher FASs), and higher benefit multipliers. As states have sought to reduce pension expenses, they have tightened eligibil­ity requirements by increasing vesting periods, and have lowered benefits by increasing the FAS period and reducing the benefit formula’s multiplier.”

The article is available here.