How prepared are state and local workers for retirement?

The major finding from the HRS analysis is that most households with state-local employment end up with replacement rates that, while on average higher than those in the private sector, are well below the 80 percent needed to maintain pre-retirement living standards. Even those households with a long-service state-local worker – those who spend more than half of their careers in public employment – have a median replacement rate, including Social Security, of only 72 percent. And this group accounts for less than 30 percent of state-local households.

The remaining 70 percent of households with a short- or medium-tenure state-local worker have
replacement rates of 48 percent and 57 percent, respectively. Adding income from financial
assets still leaves most state-local households short of the target.

Data from actuarial reports published by state and local pension systems provide part of
the explanation for these lower-than-anticipated replacement rates. Only 32 percent of workers
(with at least one year of service) who leave state-local employment each year claim an
immediate benefit. These individuals have more than 20 years of tenure on average and receive
a benefit equal to 49 percent of their pre-retirement earnings. But another 27 percent leave statelocal
employment with a deferred benefit based on their earnings at termination, which will decline in value between termination and claiming as wages and prices rise, so it will amount to less than 10 percent of their projected earnings at retirement. And 40 percent leave without any promise of future benefits. The other part of the explanation is that most households with a statelocal worker contain a person employed in the private sector, and replacement rates for private sector workers are considerably lower since many end up with nothing more than Social Security.