When people talk about a pension system, it sounds like something from the 1950s. The private sector and smart state governments, have for decades now moved away from pensions and into 401k style retirement plans with defined matching contributions. Did they do this out of greed or meanness? No. They did it because it is an exponentially better system for all involved.

Take this case study:

In 2015, the average retiring school teacher or state employee will receive about $47k per year in pension payments which are supposed to provide income until the retiree’s death. At that point the payments end, along with the state liability for them. This school teacher or state employee will have, on average, started their career in 1980 at a salary of $20k per year, and on average retired in 2015 earning $70k per year.

Now, let’s assume that same employee never had a pension plan, but instead had a 401 (k) retirement plan. Lets also assume that the State had contributed 5% to the employee’s 401 (k) plan, matching that employee’s own 5% contribution. Finally, let’s say that the employee had the simplest of retirement funds, an S&P 500 Index fund which just continuously invested equally in America’s top 500 companies over their 35 year working career. Under this scenario, that school teacher or state employee would be retiring in 2015 with a plan valued at roughly $1,200,000.

With a conservative stock market historical return of 10% per year, that same employee, if never touching the principle and only living off of the interest, would now have average income of $120k per year, vs the $47k they get from the current pension system. Immediately after his or her retirement in 2015, the S&P 500 stock index rose 12% in 2016 and then 22% in 2017. This would have meant gains of $144k and $264k in those years. Further, upon death, they still have this $1.2 million wealth fund to pass on to their spouse or family members. With the pension plan there is nothing to pass on to the family.

Please view this simple Excel spreadsheet to view the above scenario:

From 1939 to 1971, though they had promised pensions to state workers, the State of Connecticut put $0 into any plans to fund those promises. From 1971 to 1990, through Democrat and Republican administrations, the State only funded 40% of what was required to properly secure those pensions. So, what did we do in 1991 to fix the problem? That’s right, we introduced the Connecticut State Income Tax.

If the State had a 401 (k) style plan in place years ago, as it should have, there would be zero pension liabilities, compared to the roughly $70 billion necessary to catch up to past promises. With a 401 (k) style plan the State pays as it goes and it can’t carry forward future liabilities. All this gets done while providing it’s teachers and employees with by far superior retirement benefits. This is what the #1 fastest growing state has been doing for decades now, without an income tax, no car tax, and much lower property taxes.