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.

2 comments to Government Worker Understates Average Pension

  • Douglas

    If a train left Cincinnati going westbound at 75 MPH…………(5th grade math)

    I hope your mistakes were not intentional. First, if Martha Penry’s, figures on pensions are misleading yours are at least equally so.

    Where to start? It is common knowledge that the “average” state worker pay is around $68,000 per year. (You do realize this average is pulled up by a lot of professionals, political appointees, etc?) I worked for the state 37 years and only met a handful of people who made $68,000. So to arrive at your $68,000 annual retirement almost everyone would have to work 40 years, which is not the case.

    I worked 37 years, with a decent job (electrician) and I WISH my pension was $60,000 a year. Look at the “usual suspects” when people are talking government whipping boys: DMV and Caltrans. Even with 30 years service, their pensions will be less than HALF your $60,000 “average”. Again, the governors board members, consultants, and financial officers, (David Crane, Michael Genest, et al) are driving up the average.

    So far, though, we are just talking opinions and appearances. Now to the math:

    “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. “

    The average “career” employee (30 years and more) may receive $68,000 per year, but to arrive at the total paid, you must average ALL new retirees, even those who worked only five years. Which, I believe, if you go back to page 151 of CalPERS Annual Report, you will find to be in the $23,000 range.

    CalPERS paid out $12 billion in benefits to more than 500,000 retirees, beneficiaries, and survivors in 2010. ( Average= $24,000) I cannot fathom how we are “on track” to pay $75 B to 1.25 million retirees.

    Now, as you ask: “Shall the taxpayers………….really be called upon to make up a difference of that magnitude ?”

    That “difference” is not made up by the taxpayer. The outgoing pension payments come from the pension fund, currently over $200B. The 3% cost to the state has remained fairly constant over time, and is on track to remain so. Due to recent changes in retirement formulas and employee contributions, the cost has gone down in the last two years.

    The defined benefit pension plan is good for the employee and the taxpayer. It helps to attract and retain qualified employees at a much lower cost than the typical 401K. For the employee, it is 40 to 50% more efficient than a 401K in providing returns.
    Due to economies of scale, CalPERS supplies professional investment services at a lower cost.
    With a typical 401K, the individual invests for growth early on, then (should) switch to stable income investments when approaching retirement, which often barely keep up with inflation, sometimes with a loss in value.
    When drawing out of a 401 K, the retiree may draw out less than actuarially indicated to hedge against longer than normal life expectancy.
    The pension system does not have to worry about temporary market slumps because the risk and rewards are spread over several generations. One slump with bad timing can cripple an Individual Retirement Account.

    There are nearly equal numbers of contradictory studies or articles in the ether, which will tell us government workers are grossly overpaid or grossly underpaid. The truth more likely lies right smack dab in the middle :
    http://blogs.sacbee.com/the_state_worker/2011/10/new-study-public-private-sector-compensation-roughly-same.html

    “Public, private workers’ retirement wealth roughly equal”

    Public, private workers’ pay nearly equal

    Public, private workers’ total compensation nearly equal

    Get over it; nobody is ripping you off.

  • Editor

    Douglas – here is US Census data for local government employee pay in California:
    http://www2.census.gov/govs/apes/10locca.txt
    The average is $69,400 per year.
    Here is US Census data for state government employee pay in California:
    http://www2.census.gov/govs/apes/10stca.txt
    The average is $68,880 per year.

    To your point, I would be interested in seeing what the median income is, vs. the average, but I doubt the handful of more highly compensated jobs skews the average all that much.

    The average compensation for a worker in California’s private sector – including top management – is $50,750 per year.
    http://www.bls.gov/oes/current/oes_ca.htm#00-0000

    The same goes for the pensions – the data referenced in this post comes from CalPERS and CalSTRS own annual reports. The links are provided in the post – and to reiterate:

    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.

    Here is a table that shows what someone who works until they are 70 years old – not 30 years, or 35 years, but more like 45 years – can expect to collect from social security:
    http://www.vaughns-1-pagers.com/economics/ssa-monthly-payments.htm
    As you can see, a private sector worker earning $70K per year, retiring at age 70, will collect $27,800 per year in social security, less than half what a state or local employee making similar compensation can expect who retires 10-20 years earlier, and less than one-third what the average CalSTRS participant collects in a pension after 35 years of work.

    You may make what you wish of these figures – but they are not based on some union funded “study,” they are based on core data from the U.S. Census Bureau and the Bureau of Labor Statistics.

    With respect to benefits, however, I think the following part of your comment is naive:

    “The defined benefit pension plan is good for the employee and the taxpayer. It helps to attract and retain qualified employees at a much lower cost than the typical 401K. For the employee, it is 40 to 50% more efficient than a 401K in providing returns.
    Due to economies of scale, CalPERS supplies professional investment services at a lower cost.”

    What CalPERS assumes is a 4.75% annual return AFTER adjusting for inflation. Only on this basis can they begin to fund these pensions.

    For every 1% that this rate of return drops, the amount as a percent of salary that must be contributed each year into this pension fund increases by approximately 10%. Think about what this means if CalPERS rate of return drops by 2% or 3%?

    In my opinion CalPERS and CalSTRS are already insolvent. Because I don’t think they can earn 7.75% over time. Have you looked at the 10 year trend in the S&P 500? Adjusting for inflation, it has dropped every year for over a decade, and there is no end in sight, because consumers are burdened with too much debt and they can’t afford to engage in the type of spending that would grow the economy. It is going to take years to unwind all this debt.

    A defined benefit only works when someone is there to make up the difference when investment earnings fail to cover the outlays. And that someone is the taxpayer. If this isn’t a rip-off, I don’t know what is.