Guide to State Pensions in the USA

In the USA, over 5,550 pension plans are sponsored by state and local governments. Data from 2018 shows that more than 80% of full-time employees working for local and state governments have used defined benefit pension plans, aka the DB. Moreover, access to such arrangements was given to nearly 95% of those workers. 

In contrast, only 16% of private-sector employees have opted for DB-style plans. That sector relies more on defined contribution plans (DC) such as the 401(k). But when it comes to pensions in the public sector, they have been attracting a lot of attention in the past few years, which is why it is important to explore and explain them thoroughly. 

State and Local Retirement 

State and Local Retirement

Firstly, these public plans for retirement offer pensions based on a specific formula. In general, the average salary and years in service are compared to a determined number of employment years. A lot of participants are also eligible for adjustments related to living costs that will help their benefits’ purchasing power over time. 

There’s a significant choice of state and local retirement plans that have been developing since the 1970s after the failure of some private pension agreements for those working in the public sector. Unfortunately, there was a funding gap in 2016. Some estimates claim that the systems were underfunded by approximately $1 trillion to even $4 trillion. The figures did not change for 2019, and many claim that these forms of pensions are experiencing a silent crisis. 

Moreover, the vast number of public plans is used by roughly 21 million participants. That includes current and former employees in the public sector as well as current retirees. Overall, the majority of local and state public employees are found in education, health, welfare, public safety, transportation, etc.

Local vs. State? 

Currently, the number of local pension systems is significantly higher than those on a state-wide level. There are over 5,200 local systems and 297 state plans. However, most local plans fall under systems regulated by individual states. Even if there is a higher number of local plans, around 90% of members and 80% of assets are found in state arrangements because of that. 

Moreover, in 2017, nearly 60% of contributions by local government employees actually went into the state-regulated plans. 

In terms of state plans in 2017, Massachusetts had the highest number, i.e., 14, while Hawaii and Florida only had one. Pennsylvania topped the figures for local plans with nearly 1,600, while six states did not have any.  


Regarding pension funds, accounting standards that localities and states must follow are set and maintained by the GASB. Assets are mostly made up of corporate equities, which are not fixed-income types and could prove to be risky. Moreover, public plans have turned to alternative investments such as hedge funds, private equity, or real estate. Currently, most of the funding for pension plans is done annually through investments. On the flip side, only 8% was generated from contributions by employees in 2017.

In total, public pension plans are incredibly important in terms of savings on a national level. They actually account for nearly 20% of the total assets for retirement nationwide. 

Social Security 

Social Security

While it may seem that Social Security can provide for local and state public workers, it may not always be the case. Around 30% of those employees are not covered by this program. Additionally, they were excluded altogether in the past over tax concerns. However, when Social Security was allowed for such employees, coverage started to vary greatly. For instance, the percentage of non-covered workers was between 2%–98%, depending on the state. 

Example: New Jersey

The data outlined above expresses the complexity of state/local pension plans. There are a lot of variables in play, including funding, job differences, budgets, etc. In fact, there are simply too many plans and varieties to list. Hence, it is better to express some of the aspects of state/local pensions through an example. 

In the case of New Jersey, the state administers seven employee retirement systems. Most use the DC format. 

New Jersey Plans

These plans revolve around employee and employer contributions. While workers contribute a fixed sum from their salary (percentage), employers’ pension contributions are centered on actuary evaluations. 

There are three chief local retirement plans offered by New Jersey: 

  • Public Employee System (PERS) — for teachers, judicial workers, etc.
  • Fire and Police System (PFRS) — for fire service workers, police officers, and other law enforcement employees. 
  • Defined Contribution Program (DCRP) — eligible workers will get contribution benefits with disability and insurance coverage. 

The plans, including all others in for public workers in NJ, are overseen by the Division of Pensions and Benefits. 

Plan Choice

Moreover, in the case of firefighters and law officers, they are required by law to enroll in the PFRS. However, they can also participate in the DCRP depending on their salary size. A similar rule is in play for PERS. As you can see, local and state workers will, in most cases, have a fund developed for their occupation (e.g., judicial workers), but they will also be allowed to use other plans. Most state and local plans are like that, but as some examples from earlier have shown, their numbers and types will vary greatly. 

As for other New Jersey plans that could provide better insight into local/state programs, there are specific arrangements and funds for teachers, state police workers, judicial workers, etc. Others, like administrators or those working in higher education, can utilize the Alternate Benefit plan, which covers disability, life insurance, and pension benefits. 


Lastly, New Jersey is also an example of some issues that these types of plans are facing. 

In 2016, there was an issue with retirement loans. Namely, due to a computer error, the state failed to collect payments from loans of nearly 700 current retirees. These loans were granted while the individuals were still working over ten years ago. The error cost the system nearly $8 million, and it stacked up a decade of interest for retirees. 

Aside from that example, criticisms of the plans stem back to the Revolutionary and Civil wars, the Progressive Era, and the 1920s. They are present in the current decade, and the major cause that is said to have lead to the so-called silent crisis is an overabundance of promises offered by the plans. Another is the fact that the defined benefit contribution systems involve high-risk funding from corporate equities, which are unreliable. 


In this guide, we’ve outlined the basic traits of local/state pensions and used real-life examples to illustrate how they function. Investing in retirement plans could be a risky ordeal across the board if individuals overlook some key points.

So much of it depends on the individual, their profession, years working, retirement age, income, and other factors. The best way to ensure financial security in old age is to start planning early. Even if you have a local/state pension, it could be smart to combine with a 401(k) or IRA. Nowadays, it’s risky to believe one pension will cover you, and that’s why it’s better to investigate all the possible choices in the United States.