Public Pension vs. Private Pension: What's the Difference?

Not all pensions are made the same. Public and private are two types of pensions available to help people to create a nest-egg for their retirement, but which one do you have? These major differences may help you discover which retirement fund is helping you plan for your future. 

Access

Only certain people have access to each of these pension plans. A public pension is available to individuals that work for state and local governments—this includes law enforcement officers and firefighters. These programs are referred to as defined-benefit retirement plans where participants receive a regular monthly or weekly check, which is determined by past wages and tenure.

A private pension plan is one offered by employees that work for a company, but not every business offers private pension plans. Those who have a private pension contribute their earnings, which will begin dispersing after retirement. A private pension plan may also be referred to as a defined-contribution concept because the beneficiary must contribute to their own retirement pension.

Benefits

Many people consider public pensions better than private because the benefits are substantially better. According to the Center for Retirement Research at Boston College, benefit plans for public pensions are determined by multiplying an employee’s final average salary (usually final three or five years) by a factor for each year of service. So if an employee retires with an average salary of $50,000, he or she will receive a benefit of $20,000. 

Private sectors rely on the employee contributing to their own 401(k) plan, although some businesses match contributions up to a certain amount. Boston College determined that an employee that had a private pension would have to accumulate about $260,000 to purchase an annuity that would provide about $20,000 per year for life. 

Regulation

An employee that’s enrolled in a public pension plan is essentially trusting the government to provide them with funds once they retire. It has become an issue in the past that states can mismanage public employee pensions and some experts have begun to wonder if there should be more federal regulation for state and local pensions. 

Private pensions are protected by the Employee Retirement Income Security Act (ERISA) of 1974, which is designed to protect private pensions from being mishandled. ERISA was enacted to protect beneficiaries by:

  • Requiring the disclosure of financial and other information concerning the plan to beneficiaries
  • Establishing standards of conduct for plan fiduciaries
  • Providing for appropriate remedies and access to the federal courts

ERISA only protects pension plans in the private sector, but it does not require an employer to create a pension for employees. It only requires that those who establish the plans must meet certain minimum standards. 

Social Security

Employees in the private sector are automatically enrolled and covered by Social Security, whereas state and local governments have the option of not choosing Social Security coverage for their employees if a public pension plan already includes them. The reasoning for this is that the public pension plan can be more generous when compared to private plans because it replaces Social Security benefits.