When discussing the issue of public employee pensions, it is easy to suggest that these pensions are necessary because public employees usually don’t earn a social security benefit. While this is true, it ignores the startling disparity between the value of a social security benefit and the value of the typical public employee pension. And it isn’t hard to make the comparison.
If you go to the Social Security online “Estimated Social Security Retirement Benefit” table, you will see what you may expect to receive from social security when you retire, based on how much you earned in your last year working. A person making $65K per year, retiring on their 66th birthday, will begin to collect a monthly social security benefit of $1,609, or $19,308 per year.
In California, public employee pensions typically are calculated based on how many years the employee works, times a set percentage that usually ranges between 2.0% and 3.0%. As an example of how this would work, here are some apples to apples comparisons with social security, i.e., a public employee who enters the workforce at age 22, works for 44 years, makes $65K per year, and retires on their 66th birthday. At a 2.0% per year pension factor – which is the low end of the scale for public employees – this person will qualify for a pension equivalent to 88% of their final salary, based on 2.0% per year times 44 years worked. This equates to a monthly benefit of $4,766, or $57,200 per year.
Using the same assumptions – the same number of years working, and the same earnings during their years working – the 2.0% per year benefit will provide a public employee with a retirement income that is nearly three times better than what a private sector social security recipient will receive.
The high end of the pension benefit scale for public employees is reserved for those engaged in high-risk occupations such as police officers, correctional officers, and firefighters. While according to CalPERS own actuarial data, these individuals actually, on average, have lifespans slightly longer than the average worker – the theory is they live somewhat longer because they retire earlier and endure less financial stress – there are nonetheless compelling reasons why people who are first responders and take risks to safeguard the rest of us should earn a premium for this. The question is how much of a premium is appropriate.
A public safety employee who enters the workforce at age 22, works for 44 years, makes $65K per year, and retires on their 66th birthday – earning a 3.0% per year pension factor – will qualify for a pension equivalent to 132% of their final salary, based on 3.0% per year times 44 years worked. This equates to a monthly benefit of $7,150, or $85,800 per year, a retirement income 4.5 times better than what a social security recipient would earn after working the same number of years and earning the same amount of money.
There are countless nuances to this – public employees generally retire earlier than age 66, for example, which means they don’t qualify for as high a benefit as the comparisons made here would indicate. But early retirement also means fewer working years to set aside funds for the retirement benefit, and who doesn’t want to retire early? Many retired public employees who are still in their early 50′s collect pension incomes well in excess of social security, and are young enough to embark upon lengthy second careers.
Defenders of the public employee pension benefit – which is between 3.0x and 4.5x better than the social security benefit – claim there is little cost to the public for this disparity because most of the funds necessary to pay for this benefit are proceeds from investments by public employee pension funds, and not the burden of the taxpayer. There are several serious problems with this argument.
As argued in-depth with earlier posts, including Pension Funding and Rates of Return, The Razor’s Edge – Inflation vs. Deflation, Pension Rhetoric vs. Pension Reality, Sustainable Pension Fund Returns, California’s Personnel Costs, Maintaining Pension Solvency, and Real Rates of Return, the public employee pension funds have been overestimating how much they can earn on their funds. CalPERS still has an official projected rate of return of 4.75% after inflation. In the long term, it is unlikely CalPERS, or any other pension fund with hundreds of billions of invested assets, can earn an inflation-adjusted annual return of more than about half that. And if your fund earns half as much per year, without splitting hairs, it is roughly accurate to say your annual contribution rate to that fund has to double, in order for these defined retirement benefit promises to be met. This painful readjustment is happening now, and is one of the primary reasons our cities and counties are sliding into bankruptcy.
Another problem with this argument is the implication that investments of taxpayer sourced funds should yield returns to public employees, but not to taxpayers. Why are public employee pension funds pouring money into speculative investments, and showering the benefits of those investments onto the public sector workforce when the returns are good, then holding the taxpayer accountable to make up the difference when the returns are bad?
There’s more: Why are these quasi-government entities, using taxpayer’s money, being permitted to own shares in private sector corporations in the first place? Why aren’t more restrictions placed on the influence public employee controlled pension funds have on our corporations through becoming major shareholders? Isn’t this just another subtle but significant government encroachment on private property?
It’s important to note that the disparity between public sector pensions and social security is only one glaring example of the disparity in overall compensation between the public sector workforce and the private sector taxpayers. In most cases, public sector employees now make more in base pay than their counterparts in the private sector who have similar skills. They also receive more vacation time, sick leave, personal days, “comp” time, job security, annual cost-of-living increases, medical benefits, retirement medical benefits, auto allowances, low-interest loans, and more. The pension examples cited here, by the way, are conservative – they don’t take into account pension “spiking,” or the commonplace practice of fraudulently claiming additional disability benefits in retirement. There is a staggering cost for all this. The idea that we can continue to increase benefits to government employees, and finance this through increased indebtedness and higher taxes, is utterly unsustainable and morally bereft.
Ultimately the problem with public sector pensions goes beyond issues of financial sustainability, and like the entire compensation package public sector employees enjoy, becomes a question of fairness. For economic reasons, but also to be fair, the solution to government deficits is to lower the base pay and benefits to all public employees across the board.
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