Myths Buster

A fleet of golden parachutes? Myth Busted.

by Eric Bailey on October 4th

Here’s another myth you might have heard before: public service workers get enormous pensions, and it’s bankrupting the state.

If you guessed that this one’s false too, you’re right again. But this myth is especially dangerous, because lame-duck Governor Rell is using it to push a package of destructive changes to public service workers’ pensions, including switching to a risky 401k-style plan.

So let’s break down this dangerous fairytale. There’s a lot to know, so buckle up. Here are the three big myths.

1. Do public service employees get huge pensions?

Gov. Rell would like to make people think so. In fact, one of her proposed reforms was to cap pensions at 100k. It almost makes you think that 6-figure pensions are common. But in fact, for rank and file state employees (non-managerial classified) , the average pension is only around $26,000.

This is far from a cushy retirement – according to the National Low Income Housing Coalition, to afford even a one-bedroom apartment in  Connecticut, you need to make about $37k/year.

2. But really — aren’t state pensions overly generous?

No way. Connecticut’s benefit plan that covers employees hired since 1984 is one the most moderate and least costly of any state in New England. In fact, the current plan cost less than 5% of payroll, less that most large employers pay for pension plans. Under that plan, give 30 years of your life and retire. If your salary was $50,000 a year, your pension would be $20,000. Funny how multimillionaires call this “overly generous.”

3. But wouldn’t replacing pensions with a 401(k) style plan save a ton of money?

Well, no. First, the state would still owe the same amount of money for all current retirees — that wouldn’t disappear. For new employees, 401(k) type plans(also called defined contribution plans) have higher administrative costs, and less average return.. According to a 2008 study by the National Institute of Retirement Security found that for a real pension that cost 12.5% of payroll a comparable 401(k) would cost 22.9%. 401(k) plans make Wall Street rich –that’s where the high administrative costs go. They are not a good deal for either workers or their employers.

But aren’t defined contribution plans the wave of the future? Aren’t they better for everybody? Wall Street has been leading a rush to defined contribution 401(k) type plans for obvious reasons. But most large corporations and public employers still have real pension plans because they work better for working families and employers. They’re also better for the economy, because retirees have stable benefits, even during an economic downturn, helping shorten recessions and quicken recovery.

Here’s the fact: all working families deserve the secure retirement that only a real pension plan can provide. A governor who understands that would join us in fighting to provide pensions for all working families, not try to take them away.

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