37 Compensation and Working Conditions Summer 1997

A

lthough employer costs for

employee compensation

differ between the public

sector ($25.73 per hour worked) and

the private sector ($17.49 per hour

worked), the proportions allocated to

employee benefits are roughly

comparable: 30 percent for public

sector employees and 28 percent for

private sector employees. Pensions

made up 7.4 percent of the total

benefits package in the public sector

and 3.1 percent in the private

sector1. The dollar cost differential

between sectors reflects differences

in the work activities and occupations in each sector2

.

The public and private sectors

also differ in the incidence of

employer-provided benefits. In 1993-

94, for example, the incidence of

paid sick leave, medical and dental

care, and life insurance was much

higher among public sector employees than among private sector

employees. In the private sector,

however, the incidence of benefits

for paid holidays and vacations was

higher.3

Differences in the provision of

retirement benefits between the

public and private sectors has

received much attention. The focus

has often been the differential

between benefit amounts, without

considering the factors underlying

these differences. This article uses

data from the Bureau of Labor

Statistics’ Employee Benefits Survey

(EBS)4 to make a detailed comparison of public and private pensions.

Comparisons are made between fulltime workers in State and local

governments and those in medium

and large private establishments

(those employing 100 workers or

more). These establishments are

comparable in size to most State and

local governments.5

Retirement plan coverage

In 1993-94, 96 percent of fulltime State and local government

workers were covered by a retirement plan compared to 78 percent of

workers in medium and large private

establishments. Ninety-one percent

of public employees participated in

defined benefit pension plans

compared to 56 percent of private

employees. Among private sector

employees, however, defined

contribution plan coverage was

greater than among public employees (49 percent compared to 9

percent). Among workers with

defined benefit coverage, 3 percent

of public employees and 45 percent

of private employees were also

covered by a defined contribution

plan.6

Social Security benefits are an

important component of most

workers’ retirement benefits. While

Social Security coverage is universal

in the private sector, not all public

Public and Private

Sector Defined

Benefit Pensions:

A Comparison

BY ANN C. FOSTER

Ann C. Foster is an economist in the Division of

Compensation Data Analysis and Planning,

Bureau of Labor Statistics. Telephone (202) 606-

6222.

The public and private sectors differ in the retirement benefits provided

to covered employees. But these differences are less pronounced when

factors such as employee contributions and Social Security coverage

are considered.
 Compensation and Working Conditions Summer 1997 38

employees are covered. EBS data

show that in 1994, 76 percent of

full-time participants in public

pensions were covered by Social

Security.

7

Therefore, a typical full-time

State and local government employee is covered by a defined

benefit pension plan and probably

Social Security. A typical full-time

employee in a medium or large

private establishment is covered by a

defined benefit and/or defined

contribution plan and Social

Security.

The following sections compare

provisions of defined benefit

pensions because most full-time

State and local government employees are covered by these plans.

Employee contributions

A direct comparison of plan

benefits needs to account for

employee contributions. EBS data

show that in 1994, 72 percent of

public employees with defined

benefit coverage had to contribute to

its cost. The average participant

contribution was 5.9 percent of

earnings and ranged from 5.8

percent among white-collar workers

to 6.2 percent among teachers;

among blue-collar and service

workers the average was 5.9 percent.

In comparison, in 1993, 97 percent

of participants in medium and large

private establishments had benefits

entirely paid for by their employers.

Assuming the same employer

contribution, employees who

contribute to the cost of their

coverage should expect to receive a

larger benefit than comparable

workers who do not contribute.8

Benefit formulas

Virtually all full-time public

employees (99 percent) covered by

defined benefit pension plans were

subject to terminal earnings-based

formulas. In the private sector, only

61 percent of defined benefit

participants were in terminal

earnings-based plans.9

These plans compute benefits as a

fixed percent of terminal earnings

multiplied by years of service. For

the majority of public sector participants (61 percent), terminal earnings

are the average of an employee’s

highest 3 years’ earnings. For most

private sector participants (83

percent), terminal earnings are

defined as the average of an

employee’s highest 5 years’ earnings.

The majority of participants in

plans with a terminal earnings

formula have a pension benefit

formula based on a flat percent or

factor that also varies by sector. The

average factor is 1.85 percent in

public plans and 1.48 percent in

private plans. If terminal earnings

of $50,000 are assumed, a public

employee with 30 years’ service

would receive an annual retirement

benefit of $27,750 ($50,000 x .0185

x 30); an employee in the private

sector with 30 years’ service would

receive a benefit of $22,200

($50,000 x .0148 x 30), or 80

percent of that received by the public

sector employee.

Social Security

One way in which Social Security

affects pension benefits is through

plan integration. For State and local

government workers, the employee

contribution and the formula used to

compute benefits vary by Social

Security coverage status.

Plan integration occurs when

benefits are adjusted to account for

employer Social Security costs. In

1993-94, 48 percent of full-time

private workers were in defined

benefit plans that integrated pension

benefits with Social Security

compared to 4 percent of their public

counterparts.10

Integration is usually accomplished by varying the percent of

earnings used to compute benefits.

An example of a typical integrated

formula is:

1 percent of earnings up to

$25,000 x years of service

+

1.5 percent of earnings over

$25,000 x years of service

The impact of plan integration on

the benefits received depends on a

worker’s earnings level. Research

using data from the 1991 EBS found

that for an employee retiring at age

65 with 30 years’ service and a final

salary of $25,000 or less, integrated

plans replaced a lower proportion of

final earnings than nonintegrated

plans. For a comparable employee

with a final salary of $35,000 or

more, integrated plans replaced a

greater proportion of final salary

than nonintegrated plans.11

In the public sector, an

employee’s required defined benefit

plan contribution and the formula

used to determine benefits vary by

Social Security coverage status.

Research using data from the 1990

EBS found that the average benefit

for public employees covered by

Social Security was 1.83 percent of

terminal earnings times years of

service. For those not covered by

Social Security, the average benefit

was 2.18 percent times years of

service. Public employees covered

by Social Security made lower

average contributions to their

defined benefit pension plans (5.11

percent of earnings); their counterparts without Social Security

coverage contributed 7.55 percent of

earnings towards defined benefit

pension plans.12

Normal retirement

Requirements for normal retirement differ considerably between the

public and private sectors. For

example, in 1993-94, two-thirds of

full-time public sector participants in

defined benefit plans could retire at

age 55 or earlier upon meeting

service requirements and still receive

normal (unreduced) pensions

compared to one-tenth in the private

sector. (See table 1.)

Forty-three percent of public

sector participants could retire at any

age after satisfying a service requirement, usually 30 years, much higher

than the 5 percent for participants in

the private sector. Another 21

percent of public sector participants
39 Compensation and Working Conditions Summer 1997

Medium and

large private

establishments

Medium and

large private

establishments

State and

local

governments

State and

local

governments

Requirement Requirement

Percent Percent

 Service requirement

 15 years ...................................... (

1

) -

Age 62 ........................................... 21 6

 No service requirement ............... 3 (

1

)

 Service requirement

 5 years ........................................ 5 (

1

)

 10 years ...................................... 7 5

 15 years ...................................... 1 (

1

)

 20 years ...................................... 2 -

 21-24 years ................................. (

1

) -

 25 years ...................................... 1 (

1

)

 30 years ...................................... 1 (

1

)

 More than 30 years ..................... 1 -

Age 63-64 ..................................... 2 3

 No service requirement ............... 1 -

 Service requirement

 5 years ........................................ - 3

 10 years ...................................... (

1

) -

 25 years ...................................... (

1

) -

Age 65 ........................................... 48 8

 No service requirement ............... 26 2

 Service requirement

 1-4 years ..................................... 4 (

1

)

 5 years ........................................ 15 3

 6-9 years ..................................... (

1

) (

1

)

 10 years ...................................... 2 3

 20 years ...................................... (

1

) -

 25 years ...................................... 1 -

Service requirement only .............. 5 43

 Less than 30 years ...................... (

1

) 7

 30 years ....................................... 4 29

 More than 30 years ...................... (

1

) 8

Sum of age plus service ............... 8 12

 Less than 80 ................................ 2 (

1

)

 80 ................................................. 1 4

 81-89 ............................................ 3 1

 90 ................................................. 1 4

 More than 90 ................................ 1 2

 Total with normal

retirement provision ...................... 100 100

Younger than age 55 ..................... (

 1) 1

 No service requirement ............... - (

1

)

 Service requirement

 5 years ........................................ - (

1

)

 20 years ...................................... - (

1

)

 25 years ...................................... - (

1

)

 30 years ...................................... (

1

) (

1

)

 More than 30 years

Age 55 ........................................... 4 21

 No service requirement ............... - 1

 Service requirement

 5 years ........................................ 1 2

 10 years ...................................... - (

1

)

 20 years ...................................... (

1

) (

1

)

 21-24 years ................................. - (

1

)

 25 years ...................................... (

1

) 5

 30 years ...................................... 3 11

 More than 30 years ..................... (

1

) 1

Age 56-59 ..................................... (

1 ) (1

)

 Service requirement

 20 years ...................................... (

1

) -

 25 years ...................................... - (

1

)

 30 years ...................................... (

1 ) -

Age 60 ........................................... 13 5

 No service requirement ............... 3 2

 Service requirement

 5 years ........................................ 3 2

 6-9 years ..................................... - (

1

)

 10 years ...................................... 1 1

 15 years ...................................... (

1

) -

 20 years ...................................... (

1

) -

 25 years ...................................... 1 (

1

)

 30 years ...................................... 4 (

1

)

 More than 30 years ..................... (

1

) -

Age 61 ........................................... (

1

) -

1

 Less than 0.5 percent.

Table 1. Requirements for normal retirement, full-time employees, by establishment type, 1993-94

could retire at age 55, most commonly after satisfying a service

requirement of 30 years. In the

private sector, 4 percent of defined

benefit plan participants could retire

at age 55 after satisfying a service

requirement, also commonly 30

years. In comparison, 48 percent of

private sector participants had a

minimum age of 65 for normal

retirement (with varying service

requirements) compared to 8 percent

of public sector participants.

Early retirement

Among defined benefit participants in 1993-94, 95 percent of

private sector and 87 percent of

public sector employees participated

in plans allowing early retirement.

Among private sector participants

with early retirement provisions, the

greatest proportion were in plans

allowing early retirement at age 55

with 10 years of service (34 percent),

but substantial proportions were in

plans allowing early retirement at

age 55 with 5 years of service (21

percent) and age 55 with 15 years of

service (13 percent).

 NOTE: Because of rounding, sums of individual items may not

equal totals. Dash indicates no employees in this category.
 Compensation and Working Conditions Summer 1997 40

The most common age and service requirements for public sector

participants were age 55 and 5 years

of service (11 percent), age 55 and 25

years of service (10 percent), and age

55 and 10 years of service (9 percent).

Twenty percent of public sector

participants were in plans allowing

early retirement before age 55 with

varying service requirements,

compared to 9 percent of private

sector participants. Twenty-six

percent of public sector participants

were in plans with a service requirement only and could potentially

retire before age 55. Five percent of

private sector participants were in

such plans.13

Benefit comparisons

Wage replacement rates are a

better indication of the degree of

income protection provided by a

retirement plan than absolute benefit

amounts. A replacement rate is the

proportion of a retiree’s pre-retirement earnings during his or her final

year of work that is “replaced” by the

pension benefits received.

When defined benefit pension

plan benefits are considered in

isolation, public employees usually

have higher replacement rates than

private employees. When Social

Security benefits are considered,

however, a different pattern emerges.

As may be seen in table 3,

average replacement rates increase

with years of service. 14 When

considering pensions only, however,

public employees without Social

Security have the highest replacement rates and private employees

the lowest.

Because virtually all public

sector participants are in plans

with a terminal earnings formula,

pension only replacement rates

vary little as final earnings levels

increase. For private sector

participants, replacement rates

decrease with earnings levels.

One reason is that 22 percent are

in plans with a dollar amount

formula that provides the same

benefit to all workers at equal

levels of service regardless of

earnings histories. This results in

a decrease in the replacement rate

as earnings increase.15

Social Security benefits replace

more pre-retirement earnings for

those at lower earnings levels.

 Total with early

retirement provision ................. 100 100

Younger than age 55 ................ 9 20

 No service requirement .......... (

1

) -

 Service requirement

 5 years ................................... 1 8

 6-9 years ................................ (

1

) (

1

)

 10 years ................................. 2 1

 15 years ................................. 1 1

 20 years ................................. 1 5

 25 years ................................. 2 1

 30 years ................................. (

1

) 3

Age 55 ...................................... 72 46

 No service requirement .......... 2 -

 Service requirement

 Less than 5 years .................. 1 3

 5 years ................................... 21 11

 6-9 years ................................ (

1

) 1

 10 years ................................. 34 9

 11-14 years ............................ (

1

) -

 15 years ................................. 13 5

 20 years ................................. 2 3

 25 years ................................. (

1

) 10

 30 years ................................. - 2

Age 56-59 ................................ 1 -

 No service requirement .......... - -

 Service requirement

 10 years ................................. (

1

) -

 15 years ................................. (

1

) -

 20 years ................................. (

1

) -

 25 years ................................. (

1

) -

 30 years ................................. 1 -

Age 60 ...................................... 7 3

 No service requirement .......... (

1

) -

 Service requirement

 5 years ................................... 2 (

1

)

 10 years ................................. 3 1

 15 years ................................. 1 -

 20 years ................................. (

1

) 2

Age 62 ...................................... 3 (

1

)

 No service requirement .......... (

1

) -

 Service requirement

 5 years ................................... (

1

) -

 10 years ................................. 2 (

1

)

 More than 30 years ................ (

1

) -

Service requirement only ......... 5 26

 Less than 30 years ................. (

1

) 16

 30 years .................................. 4 9

 More than 30 years ................. (

1

) (

1

)

Sum of age plus service .......... 3 3

 Less than 80 ........................... 2 3

 80 ............................................ (

1

) (

1

)

 81-89 ....................................... (

1

) -

 90 and above .......................... (

1

) -

Table 2. Requirements for early retirement, full-time employees, by establishment type, 1993-94

Medium and

large private

establishments

State and

local

governments

Medium and

large private

establishments

State and

local

governments

Requirement Requirement

Percent Percent

1

 Less than 0.5 percent. NOTE: Because of rounding, sums of individual items may not

equal totals. Dash indicates no employees in this category.
41 Compensation and Working Conditions Summer 1997

This is why replacement rates for

pension plus Social Security for both

private employees and covered

public employees decrease as final

earnings levels increase.

When Social Security benefits are

considered, replacement rates for

private employees tend to be higher

than those for public employees

without Social Security coverage.

Public employees with Social

Security, however, have the highest

combined replacement rates of all

groups.

Post-retirement pension

increases

Inflation can seriously erode the

purchasing power of a retiree’s

defined benefit pension. To prevent

such erosion, some plans specify an

automatic cost-of-living increase,

usually based on changes in the

Consumer Price Index. In 1993-94,

54 percent of public pension participants were in plans that provide

these automatic increases; in the

private sector, 4 percent of participants had such provisions.

Some employers provide a

discretionary or ad hoc increase to

adjust retiree benefits for inflation.

In 1993-94, 13 percent of public

participants were in plans that had

granted an ad hoc increase during

the previous 5 years; among private

participants, the proportion was 6

percent.16

Social Security retirement

benefits also have an automatic

annual cost-of-living adjustment

(COLA), based on changes in the

Consumer Price Index.

10 20 30

$15,000 ......................................................................... 12.2 24.5 36.8

 35,000 .......................................................................... 10.1 20.1 29.2

 65,000 .......................................................................... 9.6 19.2 28.9

$15,000 ......................................................................... 39.3 62.8 84.2

 35,000 .......................................................................... 28.1 47.3 64.6

 65,000 .......................................................................... 22.2 37.7 49.7

$15,000 ......................................................................... 17.3 34.1 51.0

 35,000 .......................................................................... 17.2 34.1 51.0

 65,000 .......................................................................... 17.3 34.2 51.0

$15,000 ......................................................................... 44.8 73.7 100.0

 35,000 .......................................................................... 35.8 62.1 86.8

 65,000 .......................................................................... 30.4 53.7 73.0

$15,000 ......................................................................... 20.8 41.8 62.6

 35,000 .......................................................................... 20.8 41.7 62.6

 65,000 .......................................................................... 20.8 41.7 62.5

Years of plan participation2

Final annual earnings

Private employees - pension only

Private employees - pension plus Social Security3

Public employees with Social Security - pension only

Public employees with Social Security -pension plus

Social Security3

Public employees without Social Security - pension only

1A replacement rate is computed by dividing a pension benefit by earnings in the final year of work. Private

employees are assumed to have retired on January 1,

1993 and public employees on January 1, 1994. Final

earnings for private employees are for 1992 and public

employees for 1993. Earnings histories, necessary for

applying pension formulas, were constructed for each

final earnings level using data provided by the Social

Security Administration.

For pension formulas integrated with Social Security

and for Social Security benefit computation, a worker is assumed to have retired after having paid into Social Security for

the same number of years as years of plan participation. Computations exclude participants in cash-account pension plans

or plans with benefits based on career contributions.

2Time spent satisfying plan participation requirements was

excluded from replacement rate computation unless the plan

specified that such time was to be included in benefit computations.

3Excludes benefits for spouses and other dependents.

(in percent)

Table 3. Average replacement rates for specified final earnings and years of service for retirement at age 65,1

full-time employees, 1993-94
 Compensation and Working Conditions Summer 1997 42

Therefore, most private sector

workers can expect their defined

benefit pension benefits to remain

unchanged, thus decreasing in real

terms during retirement. Their

Social Security benefits, however,

would increase with inflation

because of the COLA. Many public

employees will have both pension

and Social Security benefits indexed

for inflation.17

Conclusions

The argument over the generosity

of public and private pensions will

likely continue. Public sector

workers are more likely to be

covered under a defined benefit

pension plan and less apt to have

Social Security coverage than are

private sector workers. Public sector

participants in defined benefit plans

are much more likely to be able to

retire at or before age 55 and still

receive normal (unreduced) retirement benefits than are private sector

participants. Public employees are

also more likely to participate in

plans with cost-of-living adjustments

than are private employees.

Although defined benefit replacement rates are higher for public

employees, they are more apt to have

to contribute to their pensions than

private employees, most of whom

have wholly employer financed

coverage.

A pension is only one factor in an

employee’s compensation. The value

of other employer-provided benefits

and an employee’s wage rate are also

important.
43 Compensation and Working Conditions Summer 1997

—ENDNOTES—

1

 For more information on pay and benefit cost

differences, see the news release, “Employer Costs

for Employee Compensation—March 1996,”

USDL: 96-424, U.S. Department of Labor, October 10, 1996.

2For example, required government activities

like public education and safety necessitate a large

proportion of white-collar professionals and highly

skilled service occupations, respectively. Private

industry sectors such as retail and wholesale trade

have a large proportion of occupations, such as

sales, with comparatively lower compensation

costs.

For a detailed examination of how these differences in industry activity and occupational mix

influence pay and benefits, see Bradley R. Braden

and Stephanie L. Hyland, “Cost of Compensation

in Public and Private Sectors,” Monthly Labor

Review, May 1993, pp. 14-21. More information

on occupational pay differentials between the public and private sectors may be found in John E.

Buckley, “Pay in Private Industry and State and

Local Governments,” Compensation and Working Conditions, September 1996, pp. 22-26, and

Michael A. Miller, Jr., “The Public-Private Pay

Debate: What do the Data Show?,” Monthly Labor Review, May 1996, pp. 18-29.

3

 The lower incidence of vacation coverage in

the public sector is due to the large number of

teachers who rarely receive paid vacations. For

more information, see Ann C. Foster, “Employee

Benefits in the United States, 1993-94,” Compensation and Working Conditions, Spring 1997, pp.

46-50.

4

 The Employee Benefits Survey (EBS) is a

study of the incidence and characteristics of employer-provided benefits. The EBS is conducted

in three stages during a 2-year cycle. Data for

small private establishments (fewer than 100

workers) and for State and local governments are

collected in even numbered years, while data for

medium and large private establishments (100

workers or more) are collected in odd numbered

years. The EBS (1993-94) covers about 15 million public sector and 83 million private sector

workers.

5

 An earlier article used 1990-91 EBS data to

compare public and private pension benefits. In

addition to using more recent EBS data, this article examines actual replacement rates computed

from all pension plans; the earlier article used average and typical pension benefits to illustrate differences. This article examines aspects, such as

differences in early and normal retirement requirements, not covered in the earlier article. For more

information, see William J. Wiatrowski, “On the

pants are included, 17 percent of private employees and 49 percent of public employees could potentially retire before age 55. For a more detailed

comparison of public and private sector differences

in early retirement provisions, see Ann C. Foster,

“Early Retirement Provisions in Defined Benefit

Pension Plans,” Compensation and Working Conditions, December 1996, pp. 12-17.

14 The replacement rates discussed are for

a straight-life annuity or periodic payment for

the life of the retiree with no additional payments to survivors. For married employees,

the standard benefit prescribed by law is the

joint-and-survivor annuity, which provides

payments to a surviving spouse after a retiree

dies. For more information, see Looking Out

for #2: A Married Couple’s Guide to Understanding Your Benefit Choices at Retirement

from a Defined Benefit Plan, Publication

1566, U.S. Department of the Treasury, Internal Revenue Service, 1991.

15 It should be noted that dollar amount formulas are much more common in plans covering

blue-collar workers. For example, in 1993, 22

percent of all private workers covered by a defined benefit pension plan were in plans with dollar amount formulas. Seven percent of professional, technical, and related employees and 11

percent of clerical and sales employees were in

such plans compared to 36 percent of blue-collar

and service employees. While 61 percent of private sector participants were in terminal earningsbased plans, 74 percent of professional, technical,

and related employees and 73 percent of clerical

and sales employees were in such plans compared

to 48 percent of blue-collar and service employees. For more information, see Employee Benefits in Medium and Large Private Establishments, 1993.

16 The incidence of ad hoc increases was higher

in previous years when inflation was higher. For

instance, in 1989-90, 16 percent of public pension plan participants and 22 percent of private

participants were in plans that had granted at least

one ad hoc increase in the previous 5 years. For

more information, see Employee Benefits in State

and Local Governments, 1990, Bulletin 2398,

Bureau of Labor Statistics, 1992, and Employee

Benefits in Medium and Large Firms, 1989, Bulletin 2363, Bureau of Labor Statistics, 1990.

17 For examples of this effect on the purchasing power of public and private sector retirees,

see Ann C. Foster, “Comparing Public and Private Pensions,” or William J. Wiatrowski, “On

the Disparity Between Private and Public Pensions.”

Disparity between Private and Public Pensions,”

Monthly Labor Review, April 1994, pp. 3-9. This

article is an expansion and elaboration of information in Ann C. Foster, “Comparing Public and

Private Pensions,” in Retirement Benefits: Preserving Benefits in Changing Times, Selected

Proceedings of the NEA Retirement and Benefits

Forum, November 16-19, 1995, Washington, DC:

National Education Association, 1996.

6For more information, see Employee Benefits

1993 Bulletin 2456, Bureau of Labor Statistics,

Employee Benefits in State and Local

, Bulletin 2477, Bureau of

7 Employee Benefits in State and Local

.

 Research examining differences between the

systems accounted for employee contributions. For

Federal Civil Service Reand Private-Sector Retirement Systems

EPW, Congressional Research Service, June 5,

9 

minal earnings plans included 22 percent subject

to a percent of career earnings formula. Three

count pension formula and 2 percent to a percent

see 

Private Establishments

10

cent of private sector workers with defined benpension benefits not reduced to account for Social

73 percent could receive Social Security and penSecurity. For more information, see 

Benefits in Medium and Large Private Establishand 

Local Governments, 1994.

 For more information, see Avy D. Graham,

cial Security,” , March

12 

liam J. Wiatrowski, “On the Disparity Between

 Participants in plans with a sum of age plus

also be eligible to retire before age 55 if they joined