Public Pension vs. Private Retirement Savings

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    Jessica B. DeBold, CFP®, EA
    Senior Financial Planner

    Public Pension vs. Private Retirement Savings

    Traditional pension plans are slowly becoming a thing of the past for those employed in the private sector. Many people seeking careers in the public sector, such as government offices, some hospitals and public educators can still access that type of benefit. There are many factors to consider when comparing the two types of employment and the retirement plans that go along with them.

    First, consider the salary of each position. It is widely thought that those in the public sector might not have the same earnings potential as someone in the private sector, but the difference for a recent college graduate is not as large as you might think. Let’s look at Jenny and Johnny as our examples. Johnny is a Middle School teacher in Dayton, Ohio and his starting salary is $34,344. Jenny has a similar profile but wants to work in the private sector and has a starting salary of $37,728 (both according to Payscale.com). A difference of only $3,384 starting out, but the gap typically widens based on years of experience. Annual increases in the private sector are historically higher than that in the public sector, part of this can be attributed to more opportunities for advancement in the private arena. Based on this information, we can project that our teacher Johnny who started at $34,344 might work 35 years and end up with a salary of $74,905 while Jenny might end up with a salary of $103,069 after the same time period. This is a difference of $28,164 a year!

    What does all of this mean for retirement? Which is more beneficial, a public pension or private retirement savings (401(k), etc.)? Currently, a teacher in the state of Ohio must contribute 14% of their salary per year to State Teachers Retirement System (STRS) (though this percentage could be increased in the future). If we follow the example above, Johnny would work 35 years and contribute a total of $255,249 toward his retirement and end up with a pension of $55,120 for the remainder of his life. If Jenny wanted to end up with the same retirement income from Social Security benefits (though this benefit could change in the future) and salary deferral into a retirement plan, her contribution rate may need to be over 24% (6.2% Social Security, 18% deferrals with an assumed 5% growth rate during her working years and 4% during retirement) or $552,029 in total contributions. Additionally, Jenny’s retirement income wouldn’t be fixed as she would be the one responsible for investing her money and bear the risk.

    If we take this example one step further and look at the “take home” portion of income of both employee’s, the salary spread isn’t nearly as great. Remember that we projected Jenny would end up making about $28,164 more in year 35 than Johnny? If you deduct the additional retirement contributions that Jenny would need to make, her “take home” portion (after retirement savings) would only be $13,709 higher than Johnny.

    The bottom line is that there isn’t as much of a difference between a public and private employee as many might think. Johnny might not see as high of earnings potential or accumulate the assets that Jenny does, but Jenny must bear much more of the burden of accumulating assets for her retirement. Additionally, there are several other factors from a job satisfaction and flexibility standpoint that need to be evaluated as part of this decision. Whichever route you choose for a career, we are here help you develop and implement your retirement planning to ensure you meet your goals.