Johnnie Nichols, a civilian Defense Department employee, contributes to a federal pension that will let him retire at age 56, after 32 years of service.

His wife, Kimberly, a math teacher at a private business college, has no pension after two decades of teaching and running a horse farm. Their marriage reflects the new world of retirement: government employees who have secure benefits and private workers who increasingly are on their own.

“If we were both in her shoes, we’d be in a world of hurt,” says Nichols, 45, an information technology manager in Middletown, Ind. “We wouldn’t be able to retire until age 67.”

As the first wave of 79 million baby boomers heads to retirement, the nation is dividing into two classes of workers: those who have government benefits and those who don’t. The gap is accelerating in every way — pensions, medical benefits, retirement ages.

Retired government workers are twice as likely to get a pension as their counterparts in the private sector, and the typical benefit is far more generous. The nation’s 6 million retired civil servants — teachers, police, administrators, laborers — received a median benefit of $17,640 in 2005, according to the Congressional Research Service. Eleven million private-sector retirees covered by traditional pensions got $7,692.

Governments’ generosity could have serious consequences for taxpayers and pensioners. Some states — including Illinois, Indiana, Michigan, New Jersey, Ohio and West Virginia — have troubled retirement systems that may require huge tax increases, spending cuts or even defaulting on promised benefits. The U.S. government has a bigger unfunded liability for military and civil servant retirement benefits ($4.7 trillion) than it does for Social Security ($4.6 trillion).

The pension gap will continue to widen because governments pump far more money into employee pensions than companies do. Civil servants earn an average of $12.38 an hour in benefits, about $5 an hour more than private-sector workers, according to the Bureau of Labor Statistics. The difference was just $2.70 an hour in 1995.

Pension promises have “gotten out of hand,” says Peter Hanson, 73, chairman of NAI James E. Hanson Inc., a real estate firm in Hackensack, N.J. His firm offers a healthy private pension — up to 25% of compensation, given to employee retirement accounts — but it is tied to profits and given as a lump sum, not a lifetime promise of benefits.

Supporters of government pensions say the decline in private pensions is the problem, not the generosity of public retirement plans. “Rather than lower the bar for public employees, we need to stabilize retirement programs for everyone,” says Richard Ferlauto, director of pension and benefit policy for the American Federation of State, County and Municipal Employees, a union with 1.4 million members.

He acknowledges public pensions are getting more scrutiny. “People want to know, ‘Why should you have more security than us?’ ” he says. “It’s pension envy.”

A sharp contrast

State and local governments have sweetened retirement benefits during the past decade at a time when corporations have soured on them because of their cost. Only 18% of private workers now have traditional defined benefit pension plans, compared with more than 80% of government employees.

Contrary to a widely held notion, the extra government benefits aren’t compensation for lower pay. Most government workers are paid more than private employees in similar jobs, and the wage gap is growing.

A typical full-time state or local government worker made $78,853 in wages and benefits in the third quarter of 2006, $25,771 more than a typical private-sector worker, the Bureau of Labor Statistics reports. The difference was $7,604 in 2000. The compensation advantage holds true for all types of public workers, from teachers to laborers and managers. Better benefits for government workers is the biggest reason for the growing compensation gap.

“The government is in direct competition with us for employees. It’s hard to compete against these benefit packages,” says James Bellis, owner of Tree Tech, a 120-worker tree trimming company in Randolph, N.J. His company has a 401(k) plan that matches up to 2% of employee pay.

By comparison, tree trimmers working for a government in New Jersey would get a pension benefit worth more than three times that.

Superior retirement benefits for civil servants can be traced to the establishment of Social Security, which originally did not cover government employees, says E.J. McMahon, a pension expert at the Manhattan Institute, a conservative think tank that deals with economic policy. Today, three-fourths of government workers participate in Social Security, but their overall benefits have not been reduced accordingly, he says.

The boost in benefits since the 1960s reflects the rising power of public employee unions, which have thrived as industrial labor unions and the benefits they won have eroded, he says.

The growing benefit gap makes government an increasingly attractive employer.

Anneliese Crosby, 46, who codes medical records at a private hospital in Manchester, N.H., is trying to get a government job for financial reasons — better pay, benefits and job security. The hospital recently ended its pension plan for new employees. That didn’t affect Crosby, but her retirement depends mostly on contributions to her tax-deferred retirement account.

“It’s scary. I feel like I need a second job or to be on the lookout for a new job,” she says. “I should put more in my retirement account, but I can’t afford it.”

Her solution: Apply for a similar job at a Veterans Affairs hospital. She’d get a pay raise, better benefits and a secure future. “My ex-husband keeps encouraging me to get a government job, and he’s right about that,” she says.

Pensions for civil servants often are superior to private pensions in subtle ways that make a huge financial difference. For example, government pensions:

Generally base benefits on a worker’s top three earning years. Private pensions typically base benefits on the top five years of pay, which lowers the average.

Often let retirees add the value of overtime, unused leave and other benefits into the pension formula. The results can be extreme. Dover, N.H., Police Chief William Fenniman, 46, added more than $200,000 for severance, sick leave and other payouts into his three-year salary average when he retired in January. This will boost his retirement benefit to as much as $125,000 a year, more than he made as chief.

Permit early retirement at age 50 or 55 with less of a benefit reduction than private pensions.

Provide free or subsidized medical care for retirees under age 65 and supplemental coverage after that for those on Medicare.

More often provide automatic cost-of-living increases to benefits.

Baby boomer retirements will force governments to confront the rising costs of civil servant benefits. The U.S. government’s unfunded retirement obligation grew $200 billion last year to $4.7 trillion. That’s the amount the government would need today, set aside and earning investment returns, to pay for promised retirement benefits.

‘You have to be aggressive’

Before 1984, federal workers had a defined benefit plan

and no Social Security. Today, new employees have Social Security and a pension that is part defined benefit plan (lifetime monthly payments) and part defined contribution (a lump sum at retirement).

The pension is more generous than most private pensions, but workers have to pay more to take advantage of the plan. “You have to be aggressive about making contributions if you want a good retirement,” says Nichols, the Defense Department employee.

Unlike private pensions, though, the federal system still encourages early retirement. “The sweet spot for me is about age 56. When I run the numbers, the system almost forces me to retire” early, Nichols says. For example, he expects to qualify for a free supplemental annuity at age 56 that provides a benefit equal to what he’d get at age 62 under Social Security.

Another big incentive to retire early: Most governments offer health insurance to early retirees until they qualify for Medicare at 65. Massachusetts spent $377 million on retiree medical benefits last year. The state’s unfunded liability for such costs is $13.3 billion, nearly as much as its actual debt of $18.5 billion, which is counted separately.

“It’s a burden on taxpayers, of course,” says Delores Mitchell, executive director of the Massachusetts Group Insurance Commission, which runs the program. But she doesn’t foresee major benefit cuts. “States have a tradition of treating retirees well.”

Medical insurance may be the most vulnerable benefit because it has fewer legal protections than pensions, which often are guaranteed in state constitutions. Orange County, Calif., recently slashed promised retiree medical benefits, cutting its liability from $1.4 billion to $600 million. The county hasn’t done anything about its pension problem.

“Pension benefits are like a lobster trap. You can get in, but you can’t get out,” says John Moorlach, an Orange County supervisor who has tried to reduce retirement benefits for government workers.

He blames elected officials for awarding unsustainable retirement benefits to win support from employee unions. “Elected officials love to give generous retirement benefits because they don’t cost anything today and they’ll be out of office when the payments come due,” Moorlach says. “And the public? Eyes droop with boredom when you bring up the topic.”

Taxpayers on the hook

The financial soundness of civil servant pensions varies across the country. Government pensions are, on average, in a similar condition as private pensions — about 20% below the assets needed to be properly funded. But some states, especially in the industrial Midwest, have severely troubled pensions.

“The taxes needed to pay for these promises would push many of these states’ economies into a death spiral,” Chicago bankruptcy lawyer James Spiotto says.

He says public employee unions should not overestimate legal protections for pension benefits. Localities can shed their obligations in a bankruptcy filing, and states, as sovereign governments, can ignore the requirements, he says. “Unions can win all the litigation and still lose because the judgments can’t be enforced,” Spiotto says.

Tim Lee, executive director of the Texas Retired Teachers Association, says unions understand the cost of the retirement benefits. He says his association’s top goal is improving the financial health of the pension fund, not winning new benefits.

As expensive as government pensions are to taxpayers, civil servants don’t feel the benefits make them rich. Frank Caron, 49, maintains lab equipment at the University of Massachusetts Amherst. He makes about $40,000 a year.

He has contributed heavily to his pension, including an extra $74 a week to restore pension credit for earlier government jobs. That will let him retire:

At 55 with 47% of pay;

At 60 with 72% of pay;

Or at 65 with 103% of pay.

He also will have medical benefits and be eligible for Social Security at 62. “I’ve worked hard to have my ducks lined up in a row for retirement,” he says.

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The Empire Center is an independent, non-partisan, non-profit think tank located in Albany, New York. Our mission is to make New York a better place to live and work by promoting public policy reforms grounded in free-market principles, personal responsibility, and the ideals of effective and accountable government.