Jeffrey Wade
City pensions are retirement plans sponsored and funded by state and local governments. In 2022, state and local governments sponsored more than 4,000 pension plans, with over 34 million members participating in these plans. While city pensions are not insured by the Pension Benefit Guaranty Corporation (PBGC), which was established by Congress to insure defined-benefit pensions, they are subject to the Employee Retirement Income Security Act (ERISA) of 1974, which aims to provide financial stability for pensions. City pensions are typically administered by boards that oversee contributions from current employees and benefit payments to eligible retirees, ensuring the pension fund's solvency and compliance with regulations.
| Characteristics | Values |
|---|---|
| Types of pension plans | Defined-contribution and defined-benefit |
| Most common type | Defined-benefit |
| Who contributes to the plan? | Employer, occasionally employee |
| Who insures the plans? | Pension Benefit Guaranty Corporation (PBGC) |
| Who does PBGC not insure? | Federal, state, and local/municipal government pensions |
| Number of pension plans sponsored by state and local governments in 2022 | 4,000+ |
| Number of members in state and local government pension plans | 34 million+ |
| Percentage of total pension plan revenue from government contributions in 2022 | 57% |
| Percentage of total pension plan revenue from net investment earnings in 2022 | 28% |
| Percentage of total pension plan revenue from employee contributions in 2022 | 16% |
| Total assets in state-administered and local-administered government pension plans in 2023 | $4.7 trillion |
| Percentage of state and local government pension plans as part of total retirement saving assets | 21% |
| Percentage of state and local government workers not covered by Social Security as of 2021 | 27% |
| State and local government contributions as a share of direct general expenditures in 2012 | 3.9% |
| State and local government contributions as a share of direct general expenditures currently | 5% |
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What You'll Learn
Pension Benefit Guaranty Corporation (PBGC)
The Pension Benefit Guaranty Corporation (PBGC) is a United States federally chartered corporation that insures and guarantees the pensions of private sector workers. It was created by the Employee Retirement Income Security Act of 1974 (ERISA) to encourage the continuation and maintenance of voluntary private defined benefit pension plans. Defined-benefit pension plans are traditional pensions that pay a set amount each month after retirement.
PBGC's single-employer insurance program pays pension benefits up to the maximum guaranteed benefit set by law to participants who retire at 65. This amount is adjusted annually; for plans that ended in 2023, workers who retired that year at age 65 would receive up to $6,750 per month (or $81,000 per year). The benefits payable to retirees who start receiving benefits at ages other than 65 or elect survivor coverage are adjusted to be equivalent in value. The maximum monthly guarantee for the multi-employer program is lower and more complex, at $12,870 a year for a participant with 30 years of credited service.
PBGC also provides financial assistance to multi-employer pension plans that are unable to pay guaranteed benefits when due, usually in the form of loans. This ensures that retirees continue receiving their benefits. Additionally, employers can voluntarily terminate their single-employer pension plans through a standard or distress termination process. In a standard termination, the plan must have sufficient funds to pay all accrued benefits before ending. After workers receive their promised benefits, PBGC's guarantee ends. In a distress termination, where the plan lacks sufficient funds, the employer must demonstrate severe financial distress, such as the likelihood that continuing the plan would force the company's shutdown. PBGC will pay guaranteed benefits and make efforts to recover funds from the employer.
PBGC is headed by a Director, appointed by the President and confirmed by the Senate, who reports to a board of directors consisting of the Secretaries of Labor, Commerce, and Treasury, with the Secretary of Labor as chairman.
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State and local government pensions
In 2022, 86% of state and local government employees had access to a defined-benefit (DB) pension plan, and 87% of those workers participated in the DB pension plans. These public pension plans are based on members' years of service and average salary over a specified number of years of employment. Many members also receive cost-of-living adjustments to maintain the purchasing power of their benefits in retirement.
State and local governments sponsored more than 4,000 pension plans in 2022, with over 34 million members participating. Locally administered pension plans outnumber state-administered plans, but most plan members (88%) and assets (82%) are in state-administered systems. This is partly because many local government employees are covered by state plans.
In 2023, assets in state-administered and local-administered government pension plans totalled around $4.7 trillion. Corporate equities accounted for over two-thirds of these assets. These investments are riskier than fixed-income assets but tend to generate higher returns.
There has been an ongoing debate over the legal responsibility of state and local governments to provide full benefits after trust funds are exhausted. Inadequate contributions have left pension plans underfunded by at least $1.6 trillion.
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Public vs private pension plans
Public pension funds are regulated under public sector law, while private pension funds are regulated under private sector law. Local government bodies in the United States are subject to the laws passed by the states in which they exist, which include provisions such as permitted investment classes and minimum municipal obligations. The US Government's Social Security Trust Fund is the world's largest public pension fund, overseeing $2.57 trillion in assets.
Public sector pensions, such as the California Public Employees' Retirement System (CalPERS), often include cost-of-living escalators and can be more generous than private sector pensions. Private pension plans are regulated by federal laws such as the Employee Retirement Income Security Act (ERISA) and are insured by the Pension Benefit Guaranty Corporation (PBGC), which guarantees benefits should a pension plan fail. The PBGC insures more than 24,300 pension plans, covering around 31 million Americans. However, it does not insure federal, state, and local/municipal government pensions.
Pension funds in the European Union are regulated by Directive 2003/41/EC, also known as the IORP directive. This directive was recast and adopted in December 2016 to promote long-term investment via occupational pension funds. In 2006, the Pension Protection Act (PPA) was introduced in the United States, bringing new funding requirements and rules for calculating plan assets and liabilities.
New York City, for example, has five pension systems, the largest of which is NYCERS, covering most civilian employees. BERS provides retirement benefits for employees of the City and School District of New York, excluding those who retire under other retirement laws. The New York City Fire Pension Fund caters to firefighters and fire officers, while NYCPPF covers the city's police officers. TRS is available to educators working for the Department of Education of the City of New York, the City University of New York (CUNY), and New York City Charter Schools.
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Pension funding sources
Pension funds, or superannuation funds, are programs that provide retirement income. While pension funds are typically large investors in listed and private companies, they also receive funding from various sources, including government contributions, employer contributions, and investment returns.
Government Contributions
In some countries, governments establish public pension systems that are partially or fully funded by investments rather than solely relying on payroll taxes. For example, in the United States, the Social Security Trust Fund oversees $2.57 trillion in assets, making it the world's largest public pension fund. Similarly, the Australian Government's Future Fund was set up to cover pension liabilities, investing in equities, fixed income, and alternative investments.
Employer Contributions
In certain countries, employers are required by law to contribute to their employees' pension funds. For instance, the Central Provident Fund (CPF) in Singapore is a compulsory social security savings plan that mandates contributions from both employers and employees.
Investment Returns
Pension funds are increasingly diversifying their investment portfolios by investing in alternative assets such as commodities, high-yield bonds, hedge funds, and real estate. For instance, the Canada Pension Plan Investment Board (CPPIB) invests in a diversified portfolio of stocks, bonds, real estate, and other assets to secure the country's public pension system. Additionally, investing in private equity, or long-term investments in non-public companies, is becoming a popular strategy to achieve substantial profits.
Insurance Premiums
In some cases, pension plans are insured by organizations like the Pension Benefit Guaranty Corporation (PBGC) in the United States. The PBGC insures more than 24,300 private-sector pension plans, covering about 31 million Americans. However, it is important to note that the PBGC does not insure federal, state, or local/municipal government pensions.
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Pension investment strategies
Defined-Benefit Pension Plans: These are traditional pension plans that guarantee a specified monthly payout upon retirement. In the United States, the Pension Benefit Guaranty Corporation (PBGC) was established by Congress to insure defined-benefit pensions for working Americans. The PBGC covers over 31 million Americans and insures more than 24,300 pension plans in the private sector. However, it's important to note that PBGC insurance does not extend to federal, state, or local/municipal government pensions.
Alternative Asset Investments: Pension investment strategies often explore alternative asset classes beyond traditional stocks, bonds, and mutual funds. These can include real estate, private equity, venture capital, commodities, and hedge funds. Alternative assets offer potential growth and diversification benefits. However, fiduciaries of defined-contribution retirement plans must carefully evaluate and manage these investments to protect the interests of pension plan participants.
Lifetime Income Strategies: Pension investment strategies may incorporate longevity risk-sharing pools as a way to provide lifetime income for retirees. This approach aims to address the risk of outliving one's retirement savings by pooling resources and sharing longevity risk among participants.
Regulatory and Legal Considerations: Pension investment strategies must comply with relevant regulations and laws, such as the Employee Retirement Income Security Act of 1974 (ERISA) in the United States. Fiduciaries have a legal duty to act in the best interests of plan participants, investing prudently and safely managing retirement funds. However, regulatory overreach and burdensome lawsuits can sometimes hinder investment innovation and limit access to alternative investment opportunities.
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Frequently asked questions
A pension is a monthly payment made to retired employees. There are two types of pensions: defined-contribution and defined-benefit. The latter is the most common type, where employees receive monthly benefits based on a percentage of their average salary from their highest-earning years.
The PBGC is a pension insurance fund established by Congress to insure defined-benefit pensions for working Americans. Employers pay the PBGC an annual premium, and in return, the PBGC guarantees retirement benefits if the original pension plan fails.
No, the PBGC does not insure federal, state, or local/municipal government pensions.
City pensions are insured by the respective city governments. For example, the Board of Pensions and Retirement in Philadelphia manages the assets of the city's pension fund, ensuring sufficient funds to pay out benefits.
Pension plans receive most of their annual revenue from government contributions, investment earnings, and employee contributions.
