Pension Rhetoric vs. Pension Reality

As  California’s public employee retirement system teeters on the verge of complete financial collapse, defenders of the current system continue to deny this, often accusing reformers of being “public servant bashers.” But politically motivated rhetoric will not change financial reality – or the pursuit of reforms so private workers don’t endure punitive taxation to sustain a privileged class of government employees. Last week the Sacramento Bee published a guest viewpoint written by Bruce Blanning, the Executive Director of the Professional Engineers in California Government. His commentary, entitled “State retirement benefits make an easy – and unfair – target,” invites a rebuttal.

The “real truth” about CalPERS, and other public employee pension funds, is they have consistently overestimated their long-term rates of return, adjusted for inflation. Currently CalPERS official rate of return, used for projecting the funds they will have available in the future, is 4.75%. This rate exceeds key long-term indicators that should govern these projections. For example, the inflation adjusted rate of return for the Dow Jones stock index for the period 1925 through 2008 averaged 2.8% per year. Similarly, the real rate of global economic growth for the period 1950 through 2000 averaged barely 4.0% per year, and this rate was skewed upwards by debt-fueled, unsustainable growth during the 1990’s. Even at a rate of 4.75% per year, CalPERS and the other pension funds are in a precarious state, because their asset values have been hammered in the last few years and will have to bounce back at rates in well in excess of 4.75% per year if they are to remain solvent (for more on these calculations, ref. Maintaining Pension Solvency).

Another “real truth” about public employee pensions is they currently collect benefits in retirement far in excess of what private sector workers can expect from social security. Public sector workers accrue retirement benefits according to a formula that grants them between 2% and 3% of their final year’s salary, times the number of years they worked. The 3% formula, for example, means that a public sector worker who spent 25 years in the workforce would receive a pension equivalent to 75% (3% times 25 years) of their final salary when they retire – with annual adjustments upwards for inflation. This benefit often begins when public sector workers retire in their early 50’s. An apples-to-apples comparison with social security provides for about 0.7% per year in retirement “pension” for private sector workers, which is at best one-third what a public sector worker receives – even though the private sector worker retires 15 years later! And social security doesn’t begin until one reaches their mid-sixties. When defenders of California’s public sector pensions – such as Blanning – reference an “average” pension for public sector workers of only $2,100 per month, they are not mentioning the fact that this number includes pensions for workers who were only in the public workforce a few years – and these workers would therefore also be receiving social security.

In the past, public sector workers received a pension that exceeded social security because they made less during the years they worked. But this has changed completely, and today, public sector workers, on average, make more than private sector workers. They also enjoy far more paid time off – they often get 26 paid days ala the “9/80” program (where they work 9 hours per day for 9 days, then get a paid day off, i.e., 26 paid days off per year), 12 “personal days,” anywhere between 10 and 20 vacation days, plus between 14 and 17 paid holidays. Find a private sector job that provides 75 paid days off per year. California is already one of the most heavily taxed states in the U.S., yet while roads and aqueducts crumble, taxpayer-funded public employees enjoy lives of inordinate privilege and security. And if public employees earned market rates of pay and benefits, like the rest of us, there would be no deficits (ref. California’s Personnel Costs).

Perhaps the most questionable of Blanning’s arguments was this one: “Of that $2,100 [the “average” monthly benefit of a retired public servant in CalPERS], only $1 of every $8 is paid by the employer, which means the taxpayer. The rest is paid through employee contributions and earnings on the investments.” If you dissect this, it is hard to follow exactly what Blanning is trying to say. Because if this means the state (on behalf of the taxpayers) is only paying 1/8th of the funding growth required by CalPERS for each worker for their portion of the retirement fund, this suggests the other 7/8ths is being covered either by the workers themselves through withholding from their paychecks, or by fund growth through investment returns. This, in-turn, suggests Blanning is saying that CalPERS expects virtually all of its funding to come from return on investments, since most public sector workers don’t even have half their retirement fund inputs withheld from their paychecks – which is what private workers contribute to social security via withholdings. Many public pension recipients don’t have anything withheld from their paycheck to go towards their pension fund.

If California’s public employee pension benefits are not dramatically reduced, hopeful rhetoric aside, the California taxpayer is liable. Pension fund managers were over-optimistic in their projections, and using more conservative scenarios their pension funds are already insolvent. Under the current arrangement, public employees, who pay very little of the costs of their future benefits in the form of withholding from their paychecks, are expecting to receive defined retirement benefits that dwarf anything a private sector worker can reasonably expect in their own retirement. And under the current arrangement, these taxpayers are supposedly going to pay – through even higher taxes (and fees) – the difference between what public employee pension funds expect to earn in the market, and what they actually earn in the market. Until the whole system is reformed, that is the reality in California today.

To suggest that the pay and retirement benefits that public employees currently enjoy is guaranteed by the California constitution or by “contract” is to ignore reality. California’s constitution can be amended by a citizen’s initiative. And the “contracts” that created these grossly inequitable and financially disastrous public employee benefits were the product of public sector labor unions exercising inordinate and unjustified influence over state and local politicians. This is the crux of the problem, and must be reformed along with reforms to reduce public sector pay and benefits. Public employees, through their unions, pour millions of dollars into political campaigns every year in California. They currently exercise nearly absolute control over California’s state and local governments. When the people collecting the benefits are controlling the politicians who grant the benefits, no contract should be considered inviolable – particularly when the alternative is bankruptcy.

24 replies
  1. Tough Love says:

    The Last paragraph sums it up perfectly.

    Let me take it a bit further, and say it provides the justification for Taxpayers to renege on these excessive/unjustifiable Pension & retiree healthcare “promises”.

  2. ozzy says:

    “The annual adjustments upwards” COLA you refer to is slightly misleading. Social Security COLA’s are far more generous than CALPERS COLA which is limited to 2% per year. A decade or so of the near double digit inflation we know is coming and these CALPERS pensions won’t seem so generous (and they won’t be so costly on a real dollar basis).

    I think Social Security is in much worse shape in the long run. Both systems need a new Tier of benefits phased in, that’s all.

  3. Ed says:

    Ozzy – thanks for your comment. Social security withholds (employee + employer) 14% of employee pay to fund future benefits. On average, California state workers have 16% withheld to fund their future benefits. Social security pays people, on average, about 25% of what they made in their final year of work. California state workers, if they have spent their careers in state service, make at least 60% of their final year’s pay in pension benefits. For you to suggest social security is in worse shape than state worker pension funds is to ignore facts. An extra 2% contribution per year doesn’t buy you a benefit 2-3 times as big – particularly if you use realistic rates of return on investment for these funds.

    You also suggest we need a “two-tier” system in both social security and pension funds. Apparently you think social security recipients, whose taxes pay for public employee pensions that are 3x (or more) better than social security, need to see their social security benefit reduced. Here’s a better idea: What we need, if we are to provide our citizens any taxpayer funded retirement security, is for everyone to get the same treatment. Liquidate CalPERS and CalSTRS and every other public employee pension fund, and put the proceeds into the social security fund. Let every American worker, public or private, get the same deal in retirement, social security and medicare. That would be more than fair – particularly since during their careers public employees still make considerably more in pay and benefits than private sector workers.

  4. Tough Love says:

    Public Sector Unions are a CANCER on Society and a bigger threat to America’s future than all of the terrorists combined.

  5. Charles Sainte Claire says:

    You suggest that all the deductions from my paycheck for the last forty years under Contract(my money)and all the payments the State of California has paid in under Contract with me as a condition of employment(my money) and all the investments therefrom (my money) contracted with the citizens of the State of California and protected under the U. S. Constitution Article 1, Section 10 be seized without right of Law and put into Social Security, which I have been paying into for 45 years. How do you defend that?

  6. Ed says:

    Charles: In a bankruptcy proceeding, any contract can be voided. And when the people negotiating their employment contracts are (through their unions) electing and controlling the politicians who agree to these contracts – such contracts have no moral validity, even if they can be upheld in court. Unions buy our elections, own our politicians, force them to sign these “contracts,” which drives cities into bankruptcy so the city employees can make 2-4x what people make in the private sector, and then they want to raise taxes? How would you feel if you weren’t one of the beneficiaries of this travesty of democracy?

    You may wish to get a spreadsheet and compare the amount that was withheld from your paycheck with the amount you are contracted to receive in your retirement. Use a rate of return of 3.0%, or 4.75% for that matter. The numbers don’t work. Obviously I’m not familiar with your individual situation, but in most cases, public employees pay – through withholding – only a small fraction of what is necessary to cover their promised future health and pension retirement benefits.

    My suggestion to pour all those public pension funds into social security is based on what is moral, not what may or may not be legal. In a bankruptcy – and public entity bankruptcies are coming if these benefits aren’t renegotiated really soon – it would be perfectly legal to do this. From a moral perspective, I believe this is something that should have been done a long time ago. It would have helped all public employees to have empathy for the private sector workers they serve. It would be equitable and fair to see all American workers get the same deal for their taxpayer-funded retirement security.

  7. ozzy says:

    Ed-

    We can debate whether or not Social Security or CALPERS is in worse shape (certainly neither are in great shape). You can talk about how much it takes to fund CALPERS and how much less it takes to fund Social Security. I could point out to you that there really is no “Social Security Fund” that it really is an accounting trick vs. at least CALPERS has real assets. We could debate two tiers and all. (There already are two tiers of Social Security…65 vs. 67 and all taxpayers are all paying for it, like it or not). Obviously, though, this being your site, you will have the last word and can say anything you like about public pensions.

    The only real reason I commented though was to talk about inflation and COLAs, which you did not comment on. I want to hear your thoughts on it. By virtue of its past operations, Social Security has made a de facto promise to keep up with inflation, whether it is heavy or light. CALPERS has made no such promise (2% is the most you get). If you want to see the difference in such commitments, play with an immediate annuity calculator that can account for moderate to heavy inflation, and I’ll think you’ll see that CALPERS has a better chance of keeping its real long term commitments under the current configuration than SS. Or do you think that we are somehow headed for a long term deflationary environment?

    BTW I do agree with your point about retirement security for all and I am in favor of improving SS benefits for all.

  8. Charles Sainte Claire says:

    Dear Mr. Ring

    Thank you for your response.

    There is no allowance in Fedaral Law which allows a State of the Union to go bankrupt. As a Non-Safety employee of the State of California I received 2.25% of my final salary at the age of 59 after starting work at 18. We are not allowed any “spiking”. I don’t think this is unreasonable.

    The reason private pensions are inadequate is because private companies have been dumping what private workers deserve and used to have, which is a dependable defined benefit retirement. This is hardly my fault. And the reason Social Security is in such sad shape is because the Federal Goverment has been raiding their funds. In spite of efforts of California Governors attempting to do the same thing, the California State Supreme Court has forced them to pay the funds back with interest. The money was never theirs to play with.

    And the United States Supreme Court has ruled against claw backs of pension rights since they are a Contract.

    You suggest all my contributions be put into Social Security, which I have already paid in to, and call that moral? So I can receive the same benefit as those who only paid into Social Security? Theft is moral?

    If the State of California and local agencies hadn’t taken a “Pension Holiday” when the ecomomy was good and spent a lot of money on social programs they could not afford they would not now have a “Fiscal Emergency”. Individual taxpayers are also to blame for passing Initiatives without any monies to pay for them. As of September 2009 pension costs were 2.5% of total State spending. Not eactly backbreaking and will probably go down as they have in the past.

    Calpers was over 100% funded in 2001 and is currently 87% funded. 85% is considered safe and the fund will go up with the rest of the economy.

    I am thankful that we are a Nation of Laws and not of individual “morality” which is usually the emotions of the moment. “Someone else got more than me because they stuck to a longterm plan instead of instant gratification.”

    Respectfully

    Charles Sainte Claire, P. E.

  9. Editor says:

    Charles – you bring up several good points. Before responding to them, please understand the issue of finding an equitable solution to our pension crisis – and it is a crisis – is not easy. And finding it will take patience and reason. So I appreciate your reasoned arguments.

    You are correct that, to-date, States cannot declare bankruptcy. Municipalities can, however, and will, if dramatic reforms aren’t implemented very, very soon. And while a State is not permitted by law to declare bankruptcy, if they don’t implement equitable and dramatic reforms very quickly, they will collapse the bond market and plunge this country into a depression. If California doesn’t lower their expenditures, which will require lowering rates of compensation to public employees, they will default on their bond payments. It is that simple. The cities and counties will follow. Voters are not going to approve more taxes, and the reason they won’t is because they have realized they are paying taxes to support public employees who make twice as much as they do (when you factor in the current year costs of funding retirement health and pension benefits – public employees make at least twice as much, on average, than the rest of us).

    You have stated that after 41 years in the workforce, you got 2.25% of your final salary. This means you receive 92.25% of your final salary, with cost of living adjustments, for the rest of your life. Is this reasonable? Maybe – it depends on a lot of factors, such as how much you actually made when you worked. But please understand this – a person on social security will get about 0.7% of their pay, per year, applied to their final salary. There aren’t apples-to-apples comparisons available, unfortunately, but here is an analysis I did a few years ago that attempts to make the comparison: Calculating Employee Compensation. And for your reference, here is the U.S. government’s “Social Security Calculator,” so you can verify these findings for yourself.

    Using the tables provided on this federal website, you will see that a person who has been in the workforce for about 40 years, retiring at age 62, will make the following percentage of their final salary when they retire at age 62 and begin to collect benefits:

    At $35K per year final salary, 28%
    At $55K per year final salary, 24%
    At $75K per year final salary, 22%
    At $95K per year final salary, 19%

    Now if they work until they are 66 years old, which equates to about 45 years in the workforce, the percentage of their final salary that they will receive in social security benefits is as follows:

    At $35K per year final salary, 36%
    At $55K per year final salary, 31%
    At $75K per year final salary, 28%
    At $95K per year final salary, 24%

    What these figures indicate to me is that while your case doesn’t sound ridiculous, i.e., no spiking, no early retirement, you are still getting 92% of your final salary as a pension after 40 years working, when the normal full benefit for someone who collects social security after working for 45 years is between 24% and 36% of their final salary – about one-third what you get.

    Is it moral for you to get a taxpayer-funded retirement benefit that is triple what social security recipients collect? I don’t think this is moral at all. I don’t think this is your fault, or a product of your personal morality or immorality, but I think a system that perpetuates this sort of inequity is immoral and should be challenged. And I don’t believe morality is just something subject to the emotions of the moment. Morality is a product of reason, integrity and faith, and these words have meaning to me. The idea that morality shouldn’t inform how we design our society and our laws – or reform our society and our laws – is frightening to me.

    You are correct that the State of California took a “pension holiday.” They did a lot more than that – they overestimated what pension funds can earn over the long-term, and gave legislators some really bad advice. I don’t agree with you that CalPERS is stable financially. I think they are on the edge and all it will take is one more shock to the stock market and they will fall into the abyss.

    You may also want to check your facts regarding pension spending as a percent of total government spending in California (state and local). I did an analysis recently (ref. California Personnel Costs) and determined that if CalPERS can earn 4.75% per year, pension spending as a percent of total government expenditures will need to be 5.0%. If, as I believe, they can only sustain a real rate of return of 3.0% per year, then pension spending as a percent of total government expenditures will need to be about 8.5%. But I agree with you that pension costs are only part of the problem – the bigger problem is the overall compensation to public sector employees – their retirement health benefits, their extra paid days off, their overtime, their base rate of pay, and the intangibles: such as being unable to fire incompetent workers, and the work rules that require more workers in various positions than is often necessary.

  10. Editor says:

    Ozzy – can you provide a reference for the 2% COLA ceiling on CalPERS pensions? Is this applied to all CalPERS beneficiaries? Does this also apply for CalSTRS and other local pension funds? Before crunching the numbers, I’d like to see the basis for your claim. But if you are correct about the 2% ceiling, than you’re right about public sector pensions eventually proving more financially durable than social security, IF we experience sustained inflation. In reality, please note, the social security fund can be made solvent simply by raising the benefits age a bit and raising the cap on mandatory withholding – currently barely over $100K per year. There are no such simple fixes with our public employee pension funds. And the financial crisis regarding pension funds (and the related issue of public employee compensation and benefits in general) is right now, not in 10-20-30 years. Because of financially unsustainable compensation packages currently being enjoyed by public employees, our cities and counties and the State of California are in financial crisis right now – and without dramatic reforms it is going to get a lot worse.

  11. Charles Sainte Claire says:

    I looked up your question today about cost of living raises for State Employee Retirees. I know little about local agencies under Calpers except that the excesses the media puts in headlines always comes from them.

    The 2% per raises mentioned in news articles are the maximum allowed in State law. Please remember I am talking about State Miscellaneous employees, not Safety, not local.

    I have received notification from Calpers that cost of living adjustments for this year will be less than 2% or even nothing at all because the inflation rate stands at a minus 0.4% for the previous year.

    I don’t mind this because if I get nothing I am still 0.4% ahead of the game. If we go into double digit inflation, which is quite possible considering the amount of paper dollars the Federal Governmant is printing, my retirement will require special Legislation which only comes into effect if my purchasing power drops to 75% of my purchsing power at the time of retirement. Please see Calpers.ca.gov.

    I still maintain that a contract is a contract. If someone wants to prove the Legislature is bought and paid for with bribes then send them to jail. I pay my house payment whether some third party cheats me or not. Now that is moral and fair.

    Thank you for your considerate discussion of a difficult subject. I appreciate that you don’t stoop to perjoratives about State Employees. I worked quite hard during my career and am proud of it.

    Charles Sainte Claire, P. E.

  12. Andy Frazer says:

    This is very well-written: concise, well-researched and dead-on correct. I always appreciate it when someone can eloquently express all of my frustrations so nicely.

    Thank you for publishing this.

  13. Charles Sainte Claire says:

    I must repeat one of my thoughts. The reason that Social Security returns so poorly is because the Federal Governmant skims the money off the top which should be paying for benefits and investments for future benefits.

    Let’s talk fair here. Social Security and private enterprise defined contribution pensions are cheating the average worker. Why not insist in elevating these plans to where thay should be and were in the past instead of taking monies from those who have trustingly worked for decades and bringing everyone DOWN to the point where no one can afford to retire. Sounds more fair to me.

    Charles Sainte Claire P. E.

  14. ozzy says:

    Charles-

    Excellent point about bringing back pensions, retirement security for everyone.
    Thanks for digging out the details on the COLA, too.

    -Ozzy

  15. Joe Pensioner says:

    Tough Love doesn’t even live in this State.

    Thank God for Public Servants, such as Police, Firefighters, Caltrans, Prison Guards, CHP etc…(just to name a few) that will do these dangerous jobs that most of you can’t do. When you call 911, be thankful there is someone around to respond. These current retirement formulas were approved by the Calif. legislature and Governor in 1999 by (Senate Bill) SB 400. Everybody’s crying because they’re now jealous of us because their own 401k’s are tanking. These people have worked 30-40 years, risking their lives. It is up to us to honor these pensions.

  16. Editor says:

    Joe: This is not about respect. Everyone respects first responders and people who work in public safety. I certainly do. And most reasonable people agree there should be a premium paid to people who face danger every day in their jobs. The question is how much of a premium is appropriate – both in terms of providing equitable compensation for the risks someone has to face in their jobs, and also in terms of what is financially sustainable. As you may know, CalPERS is now admitting they may still be assuming a rate of return on their investments that is too optimistic. The rates CalPERS assumed back in the late ’90’s, when pension benefits were dramatically increased, were a product of the internet bubble, followed by the real estate bubble. CalPERS gave legislators bad advice, and these legislators, prodded by the public employee unions who provide them with campaign funds, agreed to the increases. It was hardly a democratic process, and hardly based on sound financial reasoning.

    In a debate several months ago with a commenter, he asked a good question: “If most of our generous pensions come from the return our funds invest in the market, and not out of the taxpayer’s pocket, why do you care?” That is a good question – and the answer is simple: If the market is not delivering those returns that allow your generous pension to get paid without taxing me more, than I do care. It is unfair to blame taxpaying voters for the mess the pension system is in. This mess was caused by Wall Street analysts who didn’t do their homework, and public sector union leadership who believed the rosy forecasts and pressured politicians – who they basically control – into raising the level of pension benefits. Don’t blame taxpayers for crying foul.

    In a larger sense, returning to what sort of premium is appropriate for doing dangerous jobs in the public service, how much is appropriate? Career military personnel face danger as constant, and statistically as likely to kill them or injure them, but they are not granted pension benefits that are literally five times better than social security. They earn pensions that are about twice as good as social security. The example from our military may provide an appropriate model for what an equitable and financially sustainable premium may be for public safety pensions, at least from now on. As for bureaucrats in public service who take zero risk in their jobs, I see no reason why they shouldn’t collect social security and medicare like the rest of us. It might provide them more empathy for what it really takes to prepare for retirement when you don’t have that gigantic public pension.

  17. Scott S. says:

    You’re an idiot. A 9/8/80 schedule is just like a 4/10/40. The employee works an average of 40 hours a week; he just works nine hours a day, instead of eight.

    No one I know of gets ’12 personal holidays’. Defend your statement!

    As far as holidays, state employees have recently lost two; two that were added for political reasons, i.e. MLK and Cesear Chavez. Adding those two meant that the great American Abraham Lincoln now loses his day.

    Calpers historically has beaten the market average by investing in more than just Dow Jones stocks. Astute investors routinely beat the market. Or haven’t you heard of Warren Buffett?

  18. Ed says:

    Scott – I don’t insult people who disagree with me. We won’t get anywhere that way. Here is a response to your legitimate questions.

    1 – Lots of the people who are on the 9/80 plan are salaried employees. In the private sector, salaried employees routinely work nine hour days, or longer, and they aren’t compensated extra for it. Counting every hour you work, either via a 9/80 or a 4/40, is an appropriate way to track time for hourly employees, but in the private sector, salaried professionals generally do not count every hour they work. The 9/80 program for professionals in the public sector is only one example of how public sector employees enjoy benefits that are not affordable in the private sector, and yet the taxpayers who don’t enjoy similar benefits pay so public employees can have this extra perc.

    2 – You’re right, they aren’t called “personal holidays,” they are called “personal days,” and they are quite common in the public sector. If you wish, I’ll research this again further. Maybe your agency or organization doesn’t have them, but they are common in the public sector.

    3 – Regarding actual paid holidays, are you contradicting my primary point, which is that public sector employees get more paid holidays than private sector employers do? In private companies it is rare to get more than 10 paid holidays per year, if that. In the public sector, it is rare to get less than 10 paid holidays per year, and typically they get between 14 and 17.

    Overall, public sector employees get far, far more paid time off than private sector employees. Are you disputing that statement?

    4 – CalPERS could beat the market average for a while, particularly when they were a smaller fund, and when they invested in overseas equities and real estate, where bubbles inflated returns until quite recently. But most experts in passive investment returns will agree that super large funds, i.e., funds that manage assets in the half-trillion dollar range, cannot outperform the real rate of economic growth in the economies in which they are making their investments. You are welcome to disagree, but CalPERS own analysts have been incrementally reducing their projected real rate of return for several months now. Their official rate – inflation adjusted – for projections is currently 4.75%, but they have just in the past couple of weeks admitted they may need to adjust it downwards further. I don’t think they can get anything better than about 3.0% over the long term. The implications of this reduction in terms of how much annual input these investments require is dramatic – you can review previous posts, and the spreadsheet tables therein, for much more on this.

    You are welcome to debate the facts surrounding these issues right here, anytime you like. I have refrained from name calling and displays of disrespect in this forum, because these are issues that generate strong emotions, and we need to discuss the facts and come up with solutions.

  19. ozzy says:

    Thanks for tackling inflation vs. deflation in your new post.

    As far as your comment here though, that military pensions do not get anywhere as good as California public safety, I believe you are mistaken. The US Military uses a 2.5 multiplier with 20 year out + healthcare, NO MINIMUM AGE, fully COLAed. This is a better deal than ANY pension in the CALPERS system. And I believe our vets absolutely earn it.

    In fact, the argument could be made (and is made) that California public pensions have to be good in order to compete with federal employee pensions. (military, federal police, fire, and civilian) Your arguments against CALPERS, I think, are actually against the federal retirement system, which is much larger and has no real assets in terms of actuarial funding. The feds will always be the benchmark. CALPERS is just trying to come close.

    If you truly feel that CALPERS pensions are so abhorrent, you need to argue against the Federal retirement system first.

  20. Editor says:

    Ozzy,

    Whether or not a military pension is worth only twice social security or is worth more than that depends on the pay grade. But you’re right, in many cases a military pension is comparable to a public safety pension. Here is a useful reference:

    http://www.airforcetimes.com/money/financial_advice/ONLINE.INVEST.PENSION/

    “There are three systems for calculating military pensions, and they depend on the date you first entered service.

    Under System 1, in effect for those who entered service prior to Sept. 8, 1980, retiring at 20 years is worth a straight 50 percent of final basic pay. Those who entered service from Sept. 8, 1980, to Aug. 1, 1986, are under System 2, known as “High-3,” in which those who retire at 20 years receive 50 percent of their average basic pay over their final three years of service.

    Those who entered military service after Aug. 1, 1986, may elect to receive retirement pay under the High-3 plan or the Career Status Bonus/Redux option. For 20 years of service, Redux offers a $15,000 cash bonus, but provides a pension of only 40 percent of average basic pay over a member’s final three years and also has lower inflation adjustments than High-3 over a retiree’s lifetime.

    Under System 1 and High-3, basic pay in the final year or averaged over the last three years, respectively, is multiplied by 2.5 percent for each year of service, which is how you arrive at a figure of 50 percent for 20 years. For every year beyond 20, the pension is increased by 2.5 percent, up to a maximum of 75 percent of basic pay for 30 years of active service.

    Under Redux, average basic pay over the final three earning years is multiplied by 2 percent for each year of service up to 20, then by 3.5 percent a year for each additional year up to 30, so that those who serve 30 years get the same 75 percent of average basic pay over the final three years of service as those who retire under High-3.”

    There are several nuances here that bear mention when comparing military pensions to public safety pensions. First of all, they are capped at 75% of average annual pay for the final three years of work. This is significantly different from a 3.0% per year formula which is common in public safety jobs, wherein after 30 years, even without spiking, someone can collect 90% of their final year’s salary. Also significant is the fact that in the military, most of the career personnel who remain in the service long enough to collect a pension are not officers, i.e., their pay scales top out at around $70K per year, if that. On the following chart you can see a top ranking enlisted serviceman will make $72K per year after 30 years in the service. That is their top pay grade:

    http://www.dfas.mil/militarypay/militarypaytables/2008MilitaryPayCharts35.pdf

    Determining what the average military pension is, compared to social security and compared to the average public safety employee in California is not a simple exercise. But based on the fact that most career service personnel are enlisted troops whose salaries top out in the $70K per year range, and who have their pensions capped at 75% of their final three year average, I think it is accurate to say their pensions are significantly less generous than the ones offered public safety employees in California. A social security recipient, in the same range of salary, gets about 30% of their final salary in social security benefits. So the military pension is about 2.5x what social security in the salary ranges where most recipients fall.

  21. ozzy says:

    http://www.military.com/benefits/military-pay/retired-pay/military-retired-pay-overview

    sorry, ed. you’re way behind the times.

    The pay cap was lifted years ago. Military retirees can earn in excess of 100% and they can retire much earlier than anyone in CALPERS, making it, I would say, 10x better than SS. Fed Police/ Fire/ Air Traffic, are, in my opinion, better than CALPERS, too. I believe all of them deserve good pensions, too, just as do the members of CALPERS.

    As long as CALPERS is forced to compete, it will lose.

  22. Editor says:

    Ozzy – I guess I am behind the times. A few observations:

    1 – There still is the fact of lower pay scales, in general, in the military, and no ability to spike the pension by, for example, cashing in unused vacation. So the base on which military pension calculations are made is still significantly lower, overall.

    2 – You are also still only looking at a 2.5% accrual per year for military personnel, vs. 3.0% per year for California’s public safety personnel.

    3 – The percentage of military personnel who remain in the service long enough to earn any pension is much lower than the percentage of public safety personnel who complete their careers in public safety, also lowering the total liability.

    Returning to the core question: Most everyone agrees that public safety personnel deserve a premium for the risks they take in their job, I certainly do. But it is fair to ask how much is equitable, and how much is affordable. How much is equitable is a loaded, and very subjective question. But I think the current package – the base salary, the way overtime is calculated, the paid time off, the perpetually accumulated vacation and sick-time credits, the other extra allowances and benefits, and the retirement pension and retirement health coverage – altogether is probably on the high side of what is equitable given what people make in other equally dangerous professions. And I have no doubt we can’t afford it. Maybe the military pension system is also unaffordable – but before making that assertion I would have to study the percentage of military personnel who actually log enough years in the service to earn any pension – as well as review their pay scales further.

    It is also important to note the public safety personnel in California comprise only 13% of the total public sector (state and local) workforce. Since non-safety personnel in California now enjoy rates of base pay and current benefits well beyond what people with similar education and skills earn in the private sector, I see no reason why they can’t simply collect social security and medicare when they’re retired, like the rest of us. As I’ve stated before, it would be a good way for them to see just what it really takes to prepare for retirement.

  23. Tough Love says:

    Quoting …ozzy……

    “The pay cap was lifted years ago. Military retirees can earn in excess of 100% and they can retire much earlier than anyone in CALPERS, making it, I would say, 10x better than SS. Fed Police/ Fire/ Air Traffic, are, in my opinion, better than CALPERS, too. I believe all of them deserve good pensions, too, just as do the members of CALPERS….”

    So EVERYONE “except” Private Sector taxpayers (who get about 1/3 of those in the public/military sectors) is “entitled” to (and “earned”) these rich Public Sector pensions ……. as long as the vast bulk of it is paid for by (non-Public Sector) others … again, the Private Sector Taxpayers.

    And you do not see any problem with this ?

    If not, and its not changed, you will, when those Private Sector taxpayers revolt, leaving you with one heck of a change in lifestyle when the hefty annuity you have become so dependent on dries up. The end game won’t be pretty.

  24. massimo verona says:

    Hey, if you think you have what it takes for government work; come on down and apply.

    It’s rather easy to see that nice, fat 200 billion WE SAVED UP THROUGH CONTRACTS RATIFIED BY YOUR REPRESENTATIVES and say, “Hey, I want some of that!.”

    If it’s so great and easy and opulent, why didn’t you get a state job? Too “smart”?

    I worked inside maximum security prisons for my pension, and I sure as hell never saw any of you whiners in there with me.

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