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Police and firefighter pension plans.

Police and firefighters typically may retire with full pension benefits at a younger age and with less service than other private or public sector employees. In 1990, 15 percent of full-time police and firefighters covered by defined benefit pension plans were able to retire and receive full benefits after completion of 20 years of service regardless of age.(1) This compares with 1 percent or fewer of full-time regular government employees(2) and full-time private industry employees.

In addition to being able to retire younger with full benefits, police and firefighters tend to receive more generous pension benefits than do other employees. Because the percentage of their salary used to determine the final pension benefit is often greater than that for other employees in State and local governments, the percentage of final salary replaced by the pension benefit is typically higher.

The data on police and firefighters are from the Bureau of Labor Statistics 1990 Employee Benefits Survey of State and local governments,(3) which provides representative data for 14.5 million employees. Full-time police and firefighters represent nearly 6 percent of the full-time employees in the scope of the survey.

Brief history

Dangers associated with police work and firefighting set them apart from other jobs. Police officers and firefighters may be called upon at any time to put their lives in jeopardy, a characteristic that does not fit many other gainful means of employment. In exchange for their very risky service to protect the lives and property of the public, police and firefighters have long seen a need for financial protection.

Police and firefighters in New York first organized mutual benefit associations in 1792. Financed with member dues,(4) the associations were designed to provide lump sums or daily allowances to the survivors of those who had lost their lives in service. Mutual benefit associations initially met the needs of uniformed public employees, but uniformed service became more difficult and more violent in the 1800's as crime rates began to rise. The increased risk of policing and firefighting in major cities jeopardized the mutual benefit associations' financial solvency.

In addition, machine bosses' declining political control of cities in the latter half of the 1800's marked the start of a new era in police work. While bosses ran city government, public officials used patronage to fill police and firefighting jobs. Service did not tend to be long-term. As the political bosses lost control of the cities, uniformed service began to become a career.

Because of these changes in their work, police and firefighters began to seek full pension coverage in the latter half of the 1800's. Uniformed employees argued that they were as worthy of pension coverage as Armed Forces veterans, who were covered by pensions. They cited the dangerous nature of the work and the daily physical and mental demands.

Pension coverage for private sector employees at the time was virtually non-existent.(5) Lawmakers and the public opposed pension coverage for police and firefighters, asserting that they were public servants who knew the risks inherent in their jobs. They argued that, in this way, uniformed public employees differed from conscripts in the Armed Services.

But as large private employers adopted pension plans for their employees, opposition to coverage for public servants began to decline. In 1878, New York became the first city to grant pension coverage, establishing a service pension for police officers.

Pension provisions

Police and firefighter pension plans, since their inception, have been modeled after military pensions. The fundamental concern of these plans is to keep the force youthful and physically and mentally sound by encouraging retirement at an early age.(6) This is achieved by keeping minimum age and service requirements for retirement low and allowing full benefits at an early age. Data from the 1990 BLS survey of State and local governments reflect this emphasis on retirement at an early age.

Nearly all full-time police and firefighters were covered by a defined benefit pension plan in 1990; nine-tenths could join the plans immediately upon being hired. While other government employees had similar access to retirement plans, about one-third of full-time employees with pension coverage in medium and large private industry establishments could participate in their plan immediately.(7)

As mentioned earlier, a key component of police and firefighter pension plans is the provision for receipt of full benefits--known as normal retirement benefits--at a relatively early age. Two-fifths of full-time police and firefighters needed to fulfill only a service requirement before becoming eligible for normal retirement at any age. (See table 1.) A slightly smaller proportion had a service requirement with an age requirement of 55 or younger. This compares with nearly 10 percent of full-time participants in medium and large private establishments who could retire after meeting a service requirement only, and fewer than 5 percent who could retire with full benefits at age 55 or younger.

Early retirement benefits also are often provided to participants in defined benefit pension plans. An early retirement provision allows a participant to retire at a younger age than a normal retirement provision allows. The amount of the early retirement pension is reduced because benefits begin to be paid at an earlier age and continue over a longer period.

Police and firefighters are less likely than other pension plan participants to be covered by early retirement provisions, primarily because age and service requirements for normal benefits are low. But when early retirement benefits were provided, police and firefighters frequently were subject to a smaller reduction than were other participants. Of the full-time police and firefighters who had their early retirement benefits reduced by a uniform percentage, nearly one-third had their benefit reduced by less than 3 percent for each year retired before normal retirement age.(8)

Nearly all police and firefighters were covered in 1990 by terminal earnings formulas, which provide participants with a flat percentage of salary for each year of service.(9) (See table 2.) The higher the percentage of salary prescribed by the formula, the greater the pension benefit will be, if employees participate in the plan an equal number of years. The average rate provided under these formulas was 2.2 percent of earnings for full-time police and firefighters. This compares with 1.9 percent for all full-time participants in government plans and 1.55 percent for all full-time participants in medium and large private establishments. Nearly 30 percent of uniformed employees who participated in a defined benefit pension plan had a terminal earnings formula flat rate of 2.5 percent of earnings or higher.

Value of the pension

The replacement rate is an indicator commonly used to represent the value of a pension benefit. The replacement rate represents the portion of a participant's final year's earnings(10) that is replaced by the retiree's pension. Replacement rates for defined benefit pension plans are determined by calculating an average of the maximum benefit in each plan at predetermined levels of earnings and plan participation. These benefit levels are expressed as percents of a final year's earnings.

Defined benefit pension replacement rates are calculated separately for participants who are covered by Social Security and others who are not. Finally, the combined replacement rate generated by the pension benefit and Social Security payments is calculated to identify the percentage of salary replaced by each.

When comparing police and firefighters to other employees, it is important to note that government employees are not always covered by Social Security. Nearly two-thirds of police and firefighters who participated in a defined benefit pension plan also were covered by Social Security. All full-time employees in private industry are covered by Social Security. Replacement rates provided by pension plans are higher for police and firefighters than for private-sector employees, partly because police and firefighters may not have as many sources of retirement income as other employees.(11)

Another possible explanation for the higher replacement rates in uniformed employee defined benefit pension plans is that police and firefighters also are more likely to contribute toward the cost of their plan. In 1989, fewer than 5 percent of participants in medium and large private establishments were required to assist in financing their defined benefit pension plan, in contrast to seven-tenths of police and firefighters, who usually contributed a flat percentage of earnings. Their average contribution was 6.6 percent of earnings--the highest among State and local government employees.(12)

When only the pension is considered, police and firefighters tend to have the highest defined benefit pension plan replacement rates of any occupational group covered in the State and local government survey or medium and large private establishment survey. This is true for virtually all combinations of earnings and years of plan participation studied. (See table 3.) [TABULAR DATA 3 OMITTED]

The typical pension plan for participants covered by Social Security, for example, replaces 52 percent of final earnings for the average government employee with 30 years of service and final average earnings of $35,000. A police officer or firefighter with the same years of service and final earnings has 54 percent of salary replaced. When compared with private industry, the difference is even greater. The average private sector employee with 30 years' service and final earnings of $35,000 has 29.4 percent of salary replaced. Because Social Security benefits are the same for public and private employees with equal earnings and service histories, the difference remains the same when Social Security payments are added.

As mentioned previously, police and firefighter pension plans provide for retirement at an early age. When deciding to retire, participants must consider whether their plans will replace an adequate amount of preretirement income; the replacement rate must be high enough to encourage employees to retire. At age 55, the replacement rates provided to police and firefighters are relatively high. A uniformed employee who retires at age 55 with 20 years of service and final earnings of $45,000 has 33.2 percent of final earnings replaced. At 10 years of service, a police officer or firefighter with final earnings of $35,000 would have 15 percent of salary replaced. In contrast, a private sector employee with 20 years of service and final earnings of $45,000 would have 13.3 percent of earnings replaced.

Pension plans offered to police and firefighters are different in another way from those provided to private sector employees. For police and firefighters, as the final salary level increases, there is no noticeable difference in the replacement rate. In fact, a slight increase is evident. This was not the case for full-time participants in medium and large private establishments. Higher paid employees in the private sector tend to have a smaller percentage of their final salary replaced by their pension benefit than their lesser paid counterparts have.(13)

Because not all police and firefighters are covered by Social Security, replacement rates generated by defined benefit pension plans differ depending on whether they contribute to the Social Security system. For participants with 30 years of service and final earnings of $35,000 who are covered by Social Security, 54.4 percent of final salary is replaced by the pension. Participants not covered by Social Security have 65.4 percent of salary replaced by their pension plans.


(1) Private and public employers in the United States use two major types of retirement income devices. Defined benefit pension plans calculate retirement benefits with specific formulas, generally based on salary, years of service, or both. Employers are obligated to provide benefits based on these calculations.

Defined contribution plans generally specify an employer contribution, but not a formula to determine benefits as in a defined benefit pension plan. Individual accounts are instead set up for participants, and benefits are based on amounts credited to these accounts, plus investment earnings.

In 1990, 92 percent of police and firefighters participated in a defined benefit pension plan while 13 percent participated in a defined contribution plan. (Note that some employees participated in both types of retirement plans.)

This research summary deals specifically with defined benefit pension plans.

(2) Regular government employees include professional, technical, executive, administrative, and managerial occupations; clerical, administrative support, and sales occupations; precision production, craft, and repair occupations; machine operators and inspectors; transportation and moving occupations; handlers, equipment cleaners, helpers, and laborers; and service occupations.

(3) Employee Benefits in State and Local Governments, 1990, Bulletin 2398 (Bureau of Labor Statistics, 1992). Information about State and local government employee benefits, including defined benefit pension plans, is collected biennially by the Bureau of Labor Statistics. Complete results of the most recent Survey are available in Employee Benefits in State and Local Governments, 1990, Beginning with the 1992 survey, BLS will no longer publish separate employee benefits data for police and firefighters.

(4) This historical background is drawn largely from Robert M. Fogelson, Pensions: The Hidden Costs of Public Safety, (New York, Columbia University Press, 1984).

(5) American Express Co. established the first employer-provided retirement plan in the United States in 1875. For a detailed history of defined benefit pension plans, see Patrick W. Seburn, "Evolution of employer-provided defined benefit pensions," Monthly Labor Review, December 1991, pp.16-23.

(6) Robert Tilove, Public Employee Pension Funds (New York, Columbia University Press, 1976), p. 222.

(7) Data that refer to medium and large establishments are from Employee Benefits in Medium and Large Firms, 1989, Bulletin 2363 (Bureau of Labor Statistics, 1990).

(8) The following is a typical example of how early retirement benefits are derived. If a plan's normal retirement age is 65 and the reduction factor is 6 percent per year, a person retiring at age 60 would receive 70 percent of the normal retirement benefit (5 years times 6 percent per year results in a reduction of 30 percent).

(9) A terminal earnings formula provides a pension benefit based on earnings in the final years of employment. Most police and firefighter plans with these formulas define terminal earnings as the average annual salary over a 3-year period. An example of such a formula would be 2.5 percent of terminal earnings times each year of service. A retiree with 20 years of service would receive a retirement benefit equal to 50 percent of final earnings.

(10) For more details on replacement rates, see William J. Wiatrowski, "New survey data on pension benefits," Monthly Labor Review, August 1991,pp.8-22.

(11) This also is evident from data on the incidence of defined contribution pension plan coverage in State and local governments. In 1990, nearly 10 percent of full-time police and firefighters were covered by both a defined contribution pension plan and a defined benefit pension plan, compared with one-third of full-time employees in medium and large private establishments in 1989.

(12) For additional information on differences in the contributory status of plans in the private and public sectors, see Lora Mills Lovejoy, "The comparative value of pensions in the public and private sectors," Monthly Labor Review, December 1988, pp. 18-26.

(13) One possible reason for this difference is that, while virtually all police and firefighters are covered by terminal earnings formulas, about 20 percent of full-time participants in medium and large private establishments were in plans with dollar amount formulas. These plans provide a certain dollar amount for each year worked, regardless of earnings. As earnings increase, such plans replace a smaller portion of preretirement earnings.
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Author:Bucci, Michael
Publication:Monthly Labor Review
Date:Nov 1, 1992
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