A few decades ago in the early 1980s, a majority of retirement plans — about 60 percent, according to CNN Money — were so-called “defined benefit” programs. Today, the figure is around 4 percent.
Why? Because employers just cannot afford defined benefit plans that guarantee a retiree a certain amount each month for life.
Now, the plans are 401K-type plans, which are still good for employees, but do not guarantee them a certain benefit per month for life but pays an amount per month (until the funds are gone) or allows lump sum distributions.
Traditionally, the Alabama Legislature has rewarded retired teachers and state employees for their service with cost of living adjustments (COLAs) regularly. Lawmakers failed to approve a COLA last year and likely will not approve one during the session that begins in February.
Their reasoning is that state retirees have defined benefit plans, much better than private sector programs, and the retirees knew what they would receive when they applied for state service. In addition to the pension, the state retirees receive access to individual or family medical insurance for life.
For state retirees and retired teachers, the basic retirement formula is 0.2 times years’ service, times average of best three years’ salary. So, if an employee was making $100,000 his last three years and worked for 25 years, his basic benefit would be $50,000 annually.
To get $50,000 annually in a private sector plan, a person would have to save $1 million (10 times that annual $100,000 income) and would have to be able to make 5 percent on her money —not an easy accomplishment.
It should be noted that only the state pay qualifies under the pension program. A relatively small percentage of a college coach’s salary, for instance, is state pay. The majority of it comes from alumni and booster funds and is not subject to the retirement formula.
Some believe that because of the benefit package, including pension and generous leave time, a public employment salary is worth considerably more than the same salary in the private sector.
So even if the Legislature does not award COLAs next year, retirees still have not had a bad deal.
Retired Auburn Attorney Don Eddins is publisher of The Auburn Villager newspaper and the online publication, auburnvillager.com. Before going into law, he was state Capitol reporter for The Huntsville Times and state editor for The Columbus Ledger. In college, he was sports editor of The Auburn Plainsman. Email him at firstname.lastname@example.org.