Topics
How Public Pensions Work
Most public pension plans follow a simple process:
- Employees contribute money automatically from their paychecks.
- Employers (like state or local governments) contribute their required share each year.
- The combined money is invested and grows over time by earning interest. That interest then earns even more interest.
When a public employee retires, they start receiving a monthly payment from the pension plan.
Public Pensions Are Pre-Funded
This means that the money to pay retirement benefits is set aside while employees are still working. It’s not paid directly from state or local government budgets as workers retire. Instead, the money comes from pension trust funds that grow during the employee's working years and are paid out during retirement.
Managing Public Pensions
NASRA supports professional management of these pension trust funds. Over time, states often make changes to pension plans to adjust to new conditions. These changes might affect:
- How benefits are calculated
- How much employees and employers contribute
- How the plan is structured
These changes can also impact funding, investments, and how the pension plan is governed. Other important issues include how pension payments support the economy and how pension finances affect state credit ratings. To learn more about a topic related to public pension management click on items in the list on the right side of the page.
The above illustration was modeled from one prepared by the late David P. Hayes who practiced in the employee benefits area for Milliman in Omaha, Nebraska.