Government Worker Understates Average Pension

Today’s Sacramento Bee featured a viewpoint column entitled “Pension ‘Reformers’ distort facts on benefits.” The column was written by Martha Penry, “a special education teacher’s assistant in the Twin Rivers school district.” Not disclosed in the article was the fact that Ms. Penry is also a high ranking public employee union official, as evidenced by her membership on the CSEA Board of Directors.

In her column Ms. Penry accuses “pension busters” of overstating the cost of pensions and the amount of the average pension. She claims that “three quarters of CalPERS retirees collect yearly pensions of $36,000 or less.” What Ms. Penry does not do, however, is acknowledge that the average she is referring to includes retirees who didn’t work full time, or who didn’t work much more than five years (the minimum vesting period for a pension), or who retired decades ago when pay rates and pension formulas were still fairly reasonable.

A more honest assessment of the average pension has to examine rates for people who are retiring now, under today’s pay scales and pension formulas, who have worked their full careers in government service. Here is the most recent information, drawn directly from the annual reports of Cal STRS and CalPERS:

From the CalSTRS Annual Report, page 135:
CalSTRS participants who retired during the 12 months ending June 30th, 2010 (the most recent data), earned pensions as follows:
25-30 years service, average pension $50,772 per year.
30-35 years service, average pension $67,980 per year.
35-40 years service, average pension $86,736 per year.

From the CalPERS Annual Report, page 151:
CalPERS participants who retired during the 12 months ending December 31st, 2009 (the most recent data), earned pensions as follows:
25-30 years service, average pension $53,182 per year.
30+ years service, average pension $66,828 per year.

When one considers that the highest Social Security benefit possible, for people earning over $125,000 per year, is only $31,000, starting at age 68, it boggles the mind that anyone can suggest that reducing pension formulas for California’s state workers will risk “forcing retirees into poverty.” When government workers spend an entire career in government service, they earn pensions that are literally triple (or more) what they might have expected to receive from social security.

A related point Ms. Penry makes regards not the scale of the pensions, but the amount paid into pensions. She writes “public employee pensions amount to just 3% of California’s budget.” This is also grossly misleading. To dive into the numbers and better understand why that number is far, far too low, refer to “How Rates of Return Affect Required Pension Contributions,” “Why Real Rates of Return Must Fall,” and  “California’s State AND Local Personnel Costs

An equally relevant (and faster) way to sanity check Ms. Penry’s “3%” figure, however, is to consider not what California’s taxpayers are paying today into Wall Street pension funds for their government workers, but what taxpayers will pay in the future if reforms aren’t made. There are 1.85 million state and local government employees in California. As they retire they are replacing people who retired when pay scales and pension formulas were far more sustainable. Using an average career of 30 years and an average retirement of 20 years, we are on track to have 1.25 million retired state and local workers collecting, on average, $60,000 per year in retirement pension payments. That equals $75 billion per year. Shall the taxpayers, who will collect an average social security benefit of $15,000 per year, really be called upon to make up a difference of that magnitude when Wall Street returns fail? Because that process has already begun.

Ms. Penry got one thing right in her column today – reducing pension benefits being paid to former, current and future government workers is not going to solve California’s budget woes all by itself. The base rates of pay for most government workers will also have to be reduced. It is ironic that the unions representing government workers seized the opportunity when the economy was enjoying the phony real estate boom (and the internet bubble before that) to negotiate dramatic increases to their compensation packages, yet are blind to the need to reduce those packages now that the bubbles are burst.

Anyone who believes that calls to lower pension benefits for government workers is just “pension busting,” is invited to review the data presented here and in related posts. By pretending the “average” pension includes part-time workers, workers who only logged a few years in government service, and people who retired long before pension benefits were inflated beyond sustainability, it is Ms. Penry who is distorting the facts.

The Extremists of the Status Quo

At a recent political event I encountered a libertarian group who were passing out a test designed to determine one’s political ideology. Their model had two continua represented as sides of a checkered board with 100 squares. This square board was rotated 45 degrees, with one continuum (2 opposite sides) containing the degrees between the extremes of statist (big government) vs. libertarian. The 2nd continuum on the board contained the degrees between the extremes of social liberal and social conservative. They were measuring the political opinions of attendees with a 20 question test, 10 questions designed to measure one’s statist vs. libertarian leanings, and 10 questions designed to measure one’s social liberal vs. social conservative leanings.

As an attempt to quantify voter psychographics into terms of political ideologies, this model is helpful and probably has a great deal of practical value to politicians and their campaign organizations. The choice of two ideological continuums, a moral value system, and a fiscal value system, is an astute recognition that common political labels, left and right, liberal and conservative, are multidimensional. But for political paradigms that model and map the collective political psychology of voters to properly reflect political reality – the structure of government and governance – another dimension is required.

This third continuum would measure the degrees between the extremes where vested interests collectively command and control the economy and society, and an extreme where there is a continuous and nurtured upwelling of aspiring, emergent interests. Put another way, those who favor the status-quo vs. those who favor a competitive, pluralistic system that embraces creative destruction and bestows upward mobility and material success based on merit.

When this continuum is applied, one might observe an identity of interests between anything big and entrenched, whether it is big government, big business, or big labor. Through the lens of this continuum, it is easier to recognize examples of policies that have worthy goals but also lead to the thwarting of upwardly mobile companies and individuals, despite the merit of their ideas and innovations. There aren’t many examples of how big government, big business or big labor – if they are aligned towards the status-quo extreme of mutual collusion – have been friendly towards competitive threats, whether they are emerging companies or disruptive innovations. Entrepreneurs with revolutionary, breakthrough technology to automate and improve and better our lives are disruptive to the wealth and power wherever it is; they are not always welcome.

Observing this third political continuum, representing a preference for dominance by status quo vested interests at one extreme, vs. embracing disruptive, upwardly mobile forces at the other, sends a multitude of valuable messages regarding how and where the force of democracy can be properly applied, and how enlightened electorates can be empowered. For example, embracing disruptive technologies and encouraging entrepreneurship often requires the dismantling of powerful bureaucracies across the spectra of vested interests – corporations, agencies, and unions. Such an embrace of competition and merit is color-blind and gender-blind, and gives the small players the chance to become big players; it nurtures economic pluralism in a free market. It embodies a version of capitalism that challenges conventional stereotypes.

Using the status-quo vs. upwardly mobile continuum can inform studies examining the reality of worker compensation between those who are lucky enough to work for the government, or belong to powerful private sector unions, and the rest of the workforce, who exist within the meritocracy of the globalized private sector. If you make these comparisons for workforces, the crowing by public employee union spokespersons about “executive compensation” is revealed as a canard, because the privileged members of public sector unions, ultimately, share a preference for the status quo with those wealthy elites. It is not tens of thousands of allegedly overpaid executives, but tens of millions of ordinary private sector workers, blue collar and white collar, non-union and often even those who are unionized, who occupy the other extreme on this new continuum, they are the upwardly mobile who compete in the global economy without special privileges.

If the voter demographics in the United States today could be quantified along the status-quo vs. upwardly mobile continuum – and if the consequences of a status-quo coalition controlling our political economy were adequately explained – it is likely a majority of the electorate would not prefer the status quo. But it is not social conservative vs social liberal criteria, or statist vs. libertarian criteria, that depicts this version of a society’s drift to an extreme. The commendable centrist middle squares within the two-dimensional political model described earlier do not recognize the extreme of status quo power, the reality of big government, big corporations, and big labor working in concert to perpetuate privilege and suppress competition.

Only by visualizing and aspiring to the centrist space within a cube that represents these three very distinct value continua can policymakers and policy advocates who aspire to a healthy democracy properly diagnose and cure the extreme of collusion between corporations, government, and unions, and place the other more conventional versions of left and right into their proper perspective.

The Fate of the Mourning Dove

A few months ago my wife and I noticed a pair of doves were building a nest in a nook above the front door of our home. Atop a piller, beneath an eve, inaccessible to any creature who couldn’t either fly or use a ladder, the location for this nest was thoughtfully chosen. Through the rainy days and nights of February, the birds completed their nest and sat on the eggs.

For nearly a month the birds were always there, until sometime in early March when they abandoned the nest. My wife checked the nest and verified the eggs were still there – apparently not destined to hatch, the Doves had left them to scavengers. Within a few weeks the eggs were gone, with the parents away another winged creature had broken them open and consumed them. But the doves weren’t through with us.

In April the birds returned, the female lay a new pair of eggs, and through the lengthening days they sat atop them. This time we were skeptical as to whether or not the eggs would hatch, but we were starting to get attached to this persistent, quiet pair. The neighborhood cats were also paying close attention.

On the morning of May 12th we left our homes to go to work and noticed the eggs had hatched. Within a few days we could see them, huddled next to their mother, always quiet, always still. Often the mother would perch on a rooftop nearby but away from the nest, trying to fool the ever present cats. Each day the birds grew bigger, until the pair of them began to look like small doves, and not just hatchlings.

We will never know what induced the larger of the babies to leave the nest, but on May 19th only the smaller one was still there. It didn’t take long, unfortunately, to find the larger one. The cats had captured it and mangled it, not bothering to eat it, and left its body down in the front yard by our driveway. We buried it, and hoped the mother had pushed it out so there would be enough food to feed one hatchling to maturity.

After this setback, we kept our two cats inside. Accustomed to being free during the days when we are home, the animals weren’t happy with this fate, but we figured they would only have a few days of confinement before the 2nd baby dove left the nest. We couldn’t control our neighbor’s feral cats, however, two full-time outdoor cats who preferred our property to their own since we don’t have dogs. These two cats, beautiful long haired calico females, were certain to pounce on the one remaining dove if given the chance.

What could we do? But the bird stayed in its nest, and got bigger by the day, until it was more than half the size of its mother. I remember leaving for work on May 23rd, noticing the baby sitting in the nest with its mother. Both of them were motionless, watching me, melded into each other. It is easy to anthropomorphize this mother and child. The devotion of the mother, the dependence of the child. And it was impossible to be unmoved by the sight of them, in their precarious perch above our door, menaced by the cats. The safety of the nest could not last, but they clung together and viewed the world together. What silent understanding did they share in the stillness, during this final, fleeting moment of togetherness?

During these long days of spring the sun sets to the northwest, and for a few lingering hours each evening the rays of the lowering sun shine directly onto our porch, which faces north. I will never forget the sight of this baby dove, nearly ready to leave its nest, on the evening of May 23rd. It sat alone, so motionless, so silent, bathing in its daily moment of sun, sitting in the only world it has known, its small nest, gazing towards the light. What dim awareness, what dawning realization, what rising instinct could it feel? What sense of fate served wordless notice that its time to leave had arrived?

When I left for work on May 24th I looked at this bird for the last time. It was standing in the nest, bigger than ever, motionless as always, watchful, silent. The mother was gone. The day was sunny and bright. It was time.

Later that day my wife called me at work. She had already come home for the day, and the bird was gone. She had looked around for it, and sure enough, its body was left by the driveway, in the same place as the first one. We buried its mangled body next to its sibling. My wife put flowers on the grave.

As an example of trauma, this story is trivial. As an allegory for life, this story is telling. The implacable food chain. Birds eat worms, cats eat birds, coyotes eat cats. At what level in the food chain is there awareness? When is there terror? The worm scarcely knows the bird is picking it apart. Does the bird know fear? Is the bird’s caution merely stimulus and response mechanisms, or is there a glimmer of consciousness? Certainly a cat knows the terror of being hunted, as well as the casual joy of killing. Yet we love our cats, and we love our neighbor’s cats, and see ourselves in their antics.

The fate of this family of mourning doves might symbolize scenarios of our own destiny. What fate will we encounter when we leave the nest of this solar system? Or what if the cat is the symbol of an angry planet, or a collapsed financial system, or a collective madness where the center cannot hold? What if the mourning dove is the symbol of our fragile eras of peace, so easily sundered by the feral and ravenous cats of war? In the eyes of this winged mother and her doomed child we saw the tenderness and terror of the world, and wept.

Why Real Rates of Return Must Fall

Earlier this month the Wall Street Journal published an article entitled “Private Accounts Can Save Social Security,” authored by Martin Feldstein, former chairman of President Reagan’s Council of Economic Advisors and a member of the Wall Street Journal’s board of contributors.

In this article, Feldstein made the following assertion: “With a 3% payroll deduction, someone with $50,000 of real annual earnings during his working years could accumulate enough to fund an annual payout of about $22,000 after age 67, essentially doubling the current Social Security benefit. That assumes a real rate of return of 5.5%, less than the historic average return on a balanced portfolio of stock and bond mutual funds.”

As explored in dozens of posts already, it is pretty easy to paint rosy scenarios when you assume a real rate of return of 5.5%. But “the historic average return” Mr. Feldstein alludes to presumably includes the last 40 years or so, a period during which total credit market debt in the U.S. has doubled five times, and now stands at over 350% of GDP.

In the post “National Debt and Rates of Return,” I tried to get a handle on just what all this debt is doing to our prospects for economic growth and healthy returns on investment. As documented in that article, America’s credit market debt, which includes all consumer, commercial, and government debt, totals over $50 trillion dollars. And the reason this debt has not already crippled the U.S. economy is because the cost of money to most significant debtors is below the rate of inflation. The rate of interest that borrowers pay today – whether they are the U.S. government or people signing 30 year home mortgages – is basically zero.

How then, can a pool of savers as large as America’s entire retired population expect to draw 5.5% on their investments, after inflation, for the next several decades? The reason these returns existed in the past was because we were experiencing debt fueled, unsustainable rates of rapid economic growth. Now that debt levels have reached their ceiling – even with rates at virtually zero, total debt is not increasing any more – growth must slow because less new cash is being loaned to borrowers and injected into the economy. What part of this does Mr. Feldstein fail to understand?

What is particularly irksome, beyond Feldstein’s blithe assertion that a real rate of return of 5.5% is something we can simply take as a given, is that his pronouncement provides cover to the public employee pension fund “experts” who themselves claim a real rate of return of 4.75% is sustainable for decades over decades.

Ultimately, what Feldstein is doing suggests one of two possibilities. Either Feldstein is a tool of the Wall Street cabal that conned an entire nation into drowning themselves in debt, which would mean he is required to maintain the fictional expectation of high returns forever because to change his tune now would be to admit it was all a big con, or he actually thinks the citizens of this nation can continue to pile on debt.

An excellent recent post by Chris Martenson entitled “The Failure of Fed Policy, Why Growth is Dead,” contains information that ought to pour cold water on the notion Americans can continue to grow their debt burden. In his post there is a graphic that shows when, starting in 1970, total credit debt in the U.S. doubled: 1977, 1983, 1989, 1999, and 2007. And since 2007, total credit debt has remained relatively stable, despite the fact that since 2007 the composition of the debt is shifting from the private sector to the government.

For Martin Feldstein, or anyone claiming to speak for a public employee pension fund, or anyone else for that matter, to opine on what real rate of return may be expected on assets totaling trillions of dollars, they must address the fact that total debt in the U.S. is now about 350% of our GDP. For Feldstein to ignore this fundamental variable undermines his credibility, the credibility of the Wall Street Journal, and calls into question any claim they may have to being advocates of financially realistic policies.

If Mr. Feldstein would care to suggest for me an investment portfolio that I could truly rely on to deliver a 5.5% return, after inflation, for the rest of my days, I would sell everything tomorrow to put it there. Rarely has the old disclaimer “past performance is no indicator of future results” been so apt.

The Spice Islands of Interplanetary Space

Back in July 2009, in a post “Industrialize the Solar System,” I laid out the economic “case for space:”

(1)  Space development will catalyze economic development in general, which always enables higher environmental consciousness and greater resources to address environmental challenges.

(2)  Living in space requires recycling technologies for water and air that are many times more demanding than on earth, and these technologies will have applications that will improve water and emission treatment technologies on earth.

(3)  Zero gravity manufacturing and manufacturing off the planet can eventually allow us to do potentially hazardous work in space where there is no danger to the earth’s ecosystem.

(4)  There are benefits in terms of earth observation and ecosystem management that we have only begun to realize through a presence in space.

(5)  We may build satellite solar power stations and beam the energy they produce back to earth.

(6)  We can access minerals on the Moon, Mars, other terrestrial moons, and the asteroids that eventually can take pressure off resources on earth.

To this sixth point, a fascinating comment recently surfaced on a post by Walter Russell Mead entitled “Top Green Admits ‘We are Lost‘,” where the writer quantified the amount of minerals likely to be recoverable in a relatively small (1 km diameter) asteroid. Here is an excerpt:

“A 1 km metallic asteroid (90th percentile iridium richness), mined at a rate of 1 million cubic meters per year, could provide us with the following minerals (as a multiple of our nation’s annual consumption, according to USGS):

Semiconductors –
Gallium: 8x
Germanium: 36x
Selenium: .7x

Precious Metals:
Ruthenium: 8x
Rhodium: 3x
Platinum: 2x
Iridium: 70x

That asteroid, at that specified level of consumption, would last us 500 years.”

Mead’s entire post is worth reading, along with the comments, because he discusses a recent admission by uber-green pundit George Monbiot (here is Monbiot’s original post), who has now admitted there is no shortage of fossil fuel reserves here on earth, nor the likelyhood they will be more expensive to extract than renewable alternatives any time soon.

What is fascinating about space industrialization, however, is it offers a way out of multiple conundrums:

To the extent it is government financed, it represents Keynesian stimulus that not only creates jobs, but preserves and enhances the technological prowess of whatever nation makes this investment.

It yields strategic dividends eventually, in the form of new and relatively inexhaustible sources of critical mineral resources.

It presents an opportunity to build orbiting solar power stations that may eventually deliver cheap and abundant power to cities on earth, which, along with abundant other minerals extracted from the asteroids, will potentially eliminate resource scarcity.

Like the discovery of the spice islands during the previous great era of human exploration and discovery, it creates new outposts for human civilization and vast new sectors for economic growth.

All of this occurs off the earth’s surface, taking pressure off of the relatively finite and environmentally sensitive terrestrial sources of minerals and energy resources.