Why Frequently Cited Average Pension Numbers Are Misleadingly Low

Public pension systems in California, most notably CalPERS and CalSTRS, are quick to cite their average pension amount as evidence that their pension benefits are reasonable. In addition to the pension plans themselves, many defenders of public pension plans will cite these averages themselves when attempting to counter claims that pension benefits have become excessive in recent years.

There are three very important factors that need to be accounted for when computing a raw average and using this value as an indication for what a public employee can expect to receive in retirement benefits.

Reason #1 – Failing to Adjust for Years of Service Worked

The biggest and most widely documented factor is overlooking years of service. Most analyses of average benefits include the implicit assumption that the pension benefit cited is for a full career (30 years or more) of service.

Including the pension amounts of those who have not worked a full career produces an average value that is much lower than what those who have worked a full career are receiving. Since a full-career employee is the benchmark used in measuring the equity of pension benefits, it is only appropriate to use the data that reflects that.

Reason #2 – Failing to Account for Beneficiaries

Many pension plans maintain their records in a way that makes the most sense for processing payments, but are incredibly misleading when used to calculate average pension amounts. The case of beneficiaries is a prime example of this. When a public employee qualifies for a pension, there are set guidelines for each plan depending on how beneficiaries are treated, but most plans default to the surviving spouse. In many cases, the retiree can designate additional beneficiaries as well.

So when calculating average pension amounts, if beneficiaries aren’t accurately identified and segregated from active service retirement amounts, the resulting average will be skewed downward. This is because any beneficiary payment will always be a portion of the full retirement amount, which will be incorrectly treated as if it were its own separate benefit amount. An example found on Transparentcalifornia.com illustrates this effect.

In the San Jose Police and Fire Pension Plan, there is no distinction between beneficiary and active service retirees. Consider, however, the following case of multiple beneficiaries. An individual with a retirement year of 2007 and years of service value of 25.02 received a $76,120 pension amount in 2013. Two more entries share the last name of this individual, as well as identical years of service and year of retirement but both only received $7,100 in 2012. As it is inconceivable that a San Jose police or fire retiree could retire with 25 years of service and receive an annual pension of just $7,100, these three separate entries – $76,120, $7,100, and $7,100 – are all components of one pension. So in this case, even when screening to isolate averages for pensioners with 25+ years of service, a $90,320 pension for one individual would impact the averages as three separate pensions of $30,107.

Reason #3 – The Same Pension Amount Reported in Fragmented Parts

Another potential error is when one employee’s pension is reported in fragmented parts, to account for either a divorced spouse receiving a portion of their pension, or even in cases where the retiree changed departments and received a pension amount under two or more different formulas. As indicated above, for every instance this occurs the pension amount will be reported at least 50% lower than its true value in raw average calculations.


It is entirely reasonable for pension plans to keep their payment records in a format that is most efficient and accurate for them. The observations made above are in no way suggesting that any of the data made available by the various plans is compiled in an intentionally misleading way. However, it is the responsibility of anyone who uses pension averages in their arguments, either for or against pension reform, to accurately interpret this data. Public relations professionals who represent pension systems and public sector unions often ignore reasons why pension benefits are far more generous than the statistics they come up with would indicate.

As demonstrated above, when it comes to frequently cited average pension amounts, there is much more to the story than it would appear at first glance. 

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Public Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by the George Mason University.

6 replies
  1. Avatar
    Jim Palermo says:

    In determining the health of pension plans it is useful to examine the liabilities owed active workers versus retired/disabled/survivors and compare these amounts to the total plan assets. In my suburban Chicago village where the police pension plan is 53% funded and the fire plan is 40% funded, the liabilities due the inactive workers exceeds the plan assets in both plans. There is no money in either plan for the police officers and fire fighters! This forward looking analysis can be far more revealing than the simple average pension payment.

  2. Avatar
    Tough Love says:

    Robert, Nice summary of some major reasons why the published “averages” are misleading. Here are a few more important ones:

    (1) those “averages” include those who retired many years ago with much lower than current salary scales and often on lower pension formulas
    (2) those “averages” include not just short-career workers as you mentioned, but part-time workers as well. In Public (but rarely in Private) Sector Plans, part-times workers are usually Plan participants

    The relevant figure to evaluate the generosity of Public Sector pensions (via comparison to the comparable retirement packages afforded Private Sector workers) is the pensions granted full-time, full career (long service) workers.

    But even then, a simple comparison of the dollar monthly payouts most often very materially understates the value of the Public Sector pension vs that of the Private Sector worker for two reasons:

    First, the full (unreduced) retirement age in Public Sector Plans is rarely greater than 60, and often 55 or younger for those with long service …. and even in the 40s for safety workers …. while Private Sector Plans typically have a full-unreduced retirement age of 65 (sometimes 62 with 30+ years of service). Assuming that difference is 5 years younger, means that while the typical Private Sector worker who retires at 60 gets his pension reduced by about 25% (5% for each year they retire before their full retirement age of 65) the comparable Public Sector gets their full pension at age 60. Beyond the impact of Public Sector formulas that are always MUCH richer than those of Private Sector Plans (e.g., 2 to 3% of pay per year of service vs 0.75-1.5% in Private Sector pensions) the younger unreduced Public Sector Plan full retirement age INCREASES that existing formula-driven advantage by a factor of 1.33 (i.e., unreduced Public pension of $1 vs reduced Private pension of 75 cents).

    Second, while almost all Public Sector pensions are COLA increased annually, it is extremely rare for a Private Sector Plan to include annual COLA increases. Simply comparing monthly Public/Private Sector pension payouts ignores the very substantial value of post-retirement COLA increases. On top of the greater Public Sector formula advantage and the younger full-retirement-age advantage (that being the multiplier of about 1.33), adding a COLA-increase provision to an otherwise identical plan w/o COLA increases the Plans value by the following multipliers:

    With a 3% annual COLA and retirement age 55 …. 1.40
    With a 3% annual COLA and retirement age 65 …. 1.30

    With a 2% annual COLA and retirement age 55 …. 1.26
    With a 2% annual COLA and retirement age 55 …. 1.20

    So lets do a quick Public vs Private Sector Plan “generosity” comparison (noting that the mathematical impact of these Public Sector advantages are multiplicative)…..

    Formula advantage (about 2 to 1) … 2.00
    Younger full (unreduced) retirement age advantage …. 1.33
    Inclusion of COLA advantage (from above) assume …. 1.30

    Combined Public Sector Plan advantage = 2.00×1.33×1.30 = 3.46

    This means that for 2 workers with the SAME pay, the SAME years of service, and the SAME age at retirement, the EXPECTATION is that the TYPICAL Public Sector Pension Plan will have a value at retirement almost 3.5 times greater than that of the comparable Private Sector worker.

  3. Avatar
    Robert says:

    Great points, TL.

    I am currently working on a new piece that will only further demonstrate the validity of the points you made above!

  4. Avatar
    Tough Love says:

    Robert, take a look at the comment I posted on your earlier article …”Evaluating Public Safety Pensions in California” … as it approaches this issues from the opposite perspective, not how much greater are the Public Sector pensions, but how much greater would the Private Sector worker’s salary have to be to get the SAME (much larger) pension that the Public Sector worker gets.

    The 4.62 times in THAT comment was larger because I was discussing safety workers with the richest pensions.

  5. Avatar
    Steven G says:

    If anyone would actually look at the 2013 CAFR of CALPERS you would be amazed that the amount of annual payouts nearly equal the amount of annual money contributed by employee and taxpayer. The only reason CALPERS cries about being underfunded is so they have an excuse to extract more money from the taxpayer and employees. They have to keep that 400 BILLION DOLLAR investment base growing and growing with more benefits for those on the inside. By the way you would be amazed to find out that these pension funds are THE major stockholders in the major banks and multi-national corporations.

  6. Avatar
    Steven G says:

    Did you notice how they do not project future contributions from employees and taxpayers? They only have actuarial projections from future investment income. They give you long term liabilities without even considering future contributions so they can always come out and say we are underfunded, we need more taxpayer money and employee contributions. If you look at the CAFR of pension funds you will find that the annual contributions almost match the annual payouts.

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