By Tristan Fitzpatrick
One of the biggest misunderstandings about public pensions is that if one leaves public service before they retire, then they cannot take their pension benefits with them. This belief is usually mentioned by those who say defined-contribution accounts like 401(k)s are somehow more “portable” than defined-benefit pensions. However, the truth is that public pensions are, in fact, reasonably portable.
Here are three reasons why pensions offer a large amount of portability.
1. All plans will refund public employees if they leave public service before retirement, and a majority will refund their contributions with interest.
A research paper from the National Institute on Retirement Security (NIRS) found that every public pension plan will refund an employee’s contributions if they decide to leave before retirement. Of the plans surveyed, 71% of them also said they would offer a refund on the employee’s contributions with interest. Even if a public employee decided they wanted to leave public service altogether, they still would be able to access the contributions they made to their pension plan, and most would also receive a refund with interest on their contributions.
2. Most pension systems allow employees to purchase service credits for different types of government service (including out-of-state government service).
According to the study from NIRS, “more than half of the plans surveyed allow for the purchase of credits for prior out-of-state government service.” This is important because if a public employee started their career in one state and then moved to another, they could use their previous work experience to maintain their pension benefits.
In a previous blog, we highlighted the following example of a hypothetical public employee who moved from Colorado to Wisconsin and would be able to keep their pension benefits:
“Let’s say, for example, that you are a public school teacher in Colorado. You have taught there for five years, so you are fully vested in your pension. Then, you move to Wisconsin and continue to teach in a public school there. You are able to take your contributions, plus half of your employer’s contributions, from the Colorado pension system and use it to purchase service credits for the Wisconsin pension system, allowing you to preserve your pension benefits.”
3. In most systems, workers can leave their contributions in their accounts, even if they leave public employment.
If a public employee did not want to accept a refund if they left their position before retirement, most of them could also elect to keep their contributions in the defined-benefit plan they contributed to. As NIRS notes, “depending on the interest rate credited to the member account, keeping the employee’s contributions in the public pension plan would be a good option,” as former employees can opt to receive a deferred annuity depending on their length of service.
To deny the portability of pensions is incorrect. Defined-benefit pensions offer several advantages over other retirement plans, and their portability is a unique feature that help members retain their hard-earned benefits.