Pension Reform Options

Not present on the ballot this year in California is an initiative to reformulate pension benefits for state and local government employees. The subject of dozens of posts, public employee pensions are financially unsustainable and grossly inequitable. The reasons for those assertions have been fully explored in previous posts, so the purpose of this post is not to reiterate those reasons, but to enumerate some of the key reforms that would, if they were all enacted, bring pension benefits for public sector employees down to a level that would be financially sustainable while still preserving the defined benefit option. In some cases, these reforms would have to be implemented not via an initiative amendment, but via municipal bankruptcy court – but if they were included in an initiative, it would provide a roadmap for bankruptcy courts to follow. Here goes:

(1) Lower annual pension accrual to 1999 levels for new hires:
The public sector pension formula for all new hires would be based, as before, on accruing a percentage of final salary for each year worked. For public safety employees this percent would be reduced from 3.0% per year to 2.0% per year. For all other employees, this percent would be reduced from 2.0% per year to 1.25% per year.

(2) Lower annual pension accrual to 1999 levels going forward for existing hires:
Current employees would, for all years remaining in their public sector career, accrue their retirement benefit at the new reduced percentage rate. Current employees would retain the higher percentage rate they have earned in prior years, subject to the conditions in (3).

(3) Reverse any retroactive pension accrual enhancement ever granted existing hires:
Current employees whose annual pension benefit accrual was increased retroactively from 2.0% to 3.0%, or from 1.25% to 2.0%, will retain this increase for the years subsequent to that change (subject to the conditions in item (2), but will revert to their original rate of pension benefit accrual for the years prior to that change.

(4) Retired public employees will see no change to their pension benefit.
Create a “pension review commission” to audit and adjust any existing pensions where evidence of “spiking” or other inappropriate enhancements are uncovered.

(5) Spread “final year” salary calculation over five years and eliminate “spiking”:
The final salary base for which the accrued percentage based on years worked shall be applied will be calculated as follows: The average of the final five years of each retiree’s annual compensation, adjusted for inflation, but not subject to any other adjustments. Annual compensation shall not include overtime, cashed in sick time or vacation time, bonuses, or any other form of compensation not considered base salary.

(6) Establish ceiling on maximum pension benefit:
A ceiling on eligible pension compensation shall be set at no more than 75% of the average final five years salary as calculated in item (5). Additionally, a ceiling on eligible pension compensation shall be set at no more than triple the maximum benefit awarded under social security. A floor on eligible pension compensation shall be set at no less than the benefit as calculated by social security.

(7) Raise eligible retirement age:
Public safety employees shall become eligible for pension benefits no earlier than age 55, and other employees shall become eligible for pension benefits no earlier than age 62.

(8) Reduce pension benefit by amount retiree earns in new job:
Public employees shall not be eligible to receive their full pension if they engage in work subsequent to their retirement. To the extent a public sector retiree works in any job, public or private, the gross amount they earn shall be deducted from the gross amount of their eligible pension payment.

(9) Eliminate tax-free or reduced tax pensions:
No portion of public employee pensions shall be awarded tax-free status, or subject to a reduced rate of taxation, for any reason.

(10) Aggregate multiple pensions under same ceiling:
Public employees who have earned two or more pensions by virtue of working in two or more public sector jobs for a period sufficient to vest these pensions shall have the sum of these pension benefits subject to the ceiling limitations as set forth in items (6) and (7), and these reductions to benefits shall be apportioned on a pro-rata basis to the applicable benefit plans.

(11) Require conservative pension fund investment strategy:
Public employee pension funds will be required to invest 80% of their assets in low-risk annuities.

(12) Require public employees to contribute a fair share to their pension fund:
All public employees shall contribute 50% of the amount necessary to fund their pension each year in the form of withholding from their gross earnings, with the employer contributing the other 50%.

While many of these items may violate existing collective bargaining agreements, they are worth considering either as an initiative amendment, legislation, or as the product of bankruptcy negotiation. Because these twelve items represent an equitable way to move forward with pension benefits for public employees that remain considerably better than social security, retain the security of being defined benefits, and would – if all of them were enacted today – almost certainly preserve the solvency of the public employee pension system.

50 replies
  1. Charles says:

    Your comment:
    “(3) Current employees whose annual pension benefit accrual was increased retroactively from 2.0% to 3.0%, or from 1.25% to 2.0%, will retain this increase for the years subsequent to that change (subject to the conditions in item (2), but will revert to their original rate of pension benefit accrual for the years prior to that change.

    (4) Retired public employees will see no change to their pension benefit.”

    If your idea had any reasonable chance of passing, you would certainly save a lot of money.

    Probably 20 to 25% of employees would be filing their papers and Calpers would have to employ temporary helpers to handle the deluge.

  2. Editor says:

    Charles: there is no reason the increases to pension benefits, which began in 1999 and continued to roll through local agencies right up until a few years ago, should have been retroactive. As a matter of fact, there is a case currently working its way through the courts that may accomplish what item (3) describes without an initiative or legislation. To have made that enhanced benefit retroactive was grossly irresponsible and very likely illegal.

    In any event, you are pointing out what might be an unintended consequence of proposing item (3) without additional caveats to prevent preemptive retirements. Good point. It is likely in any event that reversing the retroactive aspect of the benefit increases will occur though a lawsuit, as noted, or in bankruptcy court. As an item in an initiative, this is very hypothetical. In any event, item (7), raising the retirement age, along with item (6), putting a ceiling on retirement pensions, would mitigate the financial impact of mass retirements.

    I might add that if something similar to these suggestions isn’t implemented soon, not only are defined benefits themselves imperiled, but item (4), guaranteeing that existing retirees don’t see their pensions reduced, may not be feasible.

  3. Algernon Moncrief says:

    FOOLISH TO WASTE TIME ON ILLEGAL PROPOSALS.

    Why bother including potential solutions on this list that are retroactive, and hence clearly illegal, will not withstand court scrutiny? Read the excellent DB pension case law summary by Professor Amy Monahan at the University of Minnesota School of Law, Google it and click on “one-click download.” Also, look at the prospective, legal pension reform that was accomplished in Utah this year (went to 401Ks for new hires.)

    You’ll like Monahan’s discussion of altering the rate at which employee’s accrue pension benefits in the future. Enjoy.

  4. Editor says:

    Algernon: Thank you for the reference to the defined benefit case law summary, I will read it:
    http://www.lhc.ca.gov/studies/activestudies/pension/UniversityofMinnesota.pdf

    One initial thought – when benefit accruals were raised over the past decade or so in California, they were raised retroactively. Reversing them would simply be correcting the illegality of that act. I’m not sure why retroactive solutions that themselves are merely reversing retroactive benefit enhancements are illegal, and the attorneys I talk with on that specific topic have diverse positions.

    Most of the rest of the proposals here are problematic because they violate existing contracts. In those cases, if the illegality of the contract terms can’t be established – and I think it can with respect to how pension accrual enhancements were granted retroactively – then changing these contracts is a matter for bankruptcy courts, or for the bargaining table. I’m not convinced a 401K solution is the only way to go, although it certainly is a good idea to consider. If public sector union negotiators want to keep the defined benefit, they should consider all of these suggestions, because they represent a viable roadmap to a financially sustainable defined benefit pension for their members.

  5. SeeSaw says:

    Are you a human being or a fire-breathing dragon? Do you have a complex leaning toward sadism?

    Your suggestion for reducing retirement packages of miscellaneous employees to 1.25% would leave many near poverty. Medical premium costs would swallow up most of their benefits.

    I would suggest that read the Amicus Brief that the current AG filed in support of CalPERS beneficiares, regarding the retroactive benefits lawsuit, to which you are referring.

  6. Charles Sainte Claire says:

    “In any event, item (7), raising the retirement age, along with item (6), putting a ceiling on retirement pensions, would mitigate the financial impact of mass retirements.”

    Unless all these ideas were implemented at once by some kind of stealth arrangement and became effective immediately I can guarantee you anyone thinking about retirement soon and had a large number of years before 1999 would be out the door. So would anyone who would be subject to the 75% cap if they have surpassed that % by a considerable amount. Ditto for the three times SS cap. And also ditto for anyone whose pension is small enough they already know they will have to work part time after retiring.
    It doesn’t cost anything but your time to file.
    Anyone who would allow themselves to be clobbered like this would have to be already wealthy and really love their job. You know, the type who would work for free to begin with.
    I say 20 to 25% is a conservative estimate.
    So, out the door go the people with the most training, experience and knowledge.

  7. Fake Rex ther Wonder Dog! says:

    If your idea had any reasonable chance of passing, you would certainly save a lot of money.

    Probably 20 to 25% of employees would be filing their papers and Calpers would have to employ temporary helpers to handle the deluge.
    =================
    And for every $1 spent processing the extra paper work the state would save $100K.

  8. Fake Rex ther Wonder Dog! says:

    Why bother including potential solutions on this list that are retroactive, and hence clearly illegal, will not withstand court scrutiny? Read the excellent DB pension case law summary by Professor Amy Monahan at the University of Minnesota School of Law, Google it and click on “one-click download.”
    ==========
    Well, if Amy SAID IT then it MUST BE TRUE.

    This is not MN, this is CA. You claim it is illegal to make retroactive changes in pensions, yet that is exactly what SB400 and all the following local PERS systems did, and that is the subject of the Orange County, CA lawsuit.

    And I would also Google Prichard Alabama + Pensions + Bankruptcy court = and see how that worked out for the retirees in Alabama.

    Here, let me help out even;

    http://www.clipsyndicate.com/video/play/1470765/5_20_prichard_pension_plan

  9. Editor says:

    SeeSaw: If you do an apples-to-apples comparison between Social Security and California’s public sector defined benefits, the average social security recipient gets a benefit that would represent about a 0.7% accrual per year. So 1.25% is considerably better than that.

    If if you are a public employee, and you work for 40 years, which is the norm for private sector workers, at 1.25% per year you will get 50% of your final salary in the form of a pension.

    Here’s what a social security recipient will get, as a “percent of recent average annual income” (ref. http://www.vaughns-1-pagers.com/economics/ssa-monthly-payments.htm) if they retire at age 66, meaning they probably worked for 40 years:

    At a recent average annual income of $15K, they will collect $8.1K per year, or 54%.

    At a recent average annual income of $25K, they will collect 10.3K per year, or 41%.

    At a recent average annual income of $35K, they will collect $12.6K per year, or 36%.

    At a recent average annual income of $45K, they will collect 14.8K per year, or 32%.

    As Social Security is progressive, unlike public employee defined benefits, it goes down sharply from there, so that, for example, at a recent average annual income of $75K, they will collect 20.9K per year, or 27%.

    So perhaps the public employees should examine their humanity, since I am quite comfortable asserting that not one full time public employee in the entire state of California makes less than $20K per year, which means that virtually ALL public employees, accruing defined benefits at a rate of 1.25% per year, will collect MORE in retirement than they would have under social security.

    Generally speaking, public employees make more than private sector employees, and they work fewer hours, they get better benefits, and they have more job stability. They have no right to also collect a pension that isn’t simply better, but ridiculously better, than social security. Especially when public employee pension funds, who turn over to Wall Street over $250 billion per year (U.S. as a whole, not just California), are, in their desperation to earn a return far in excess of realistic, sustainable levels, are distorting our markets and undermining the ability for anyone else to realize a return on investment.

  10. SeeSaw says:

    I agree with you. SS benefits alone would never sustain anyone enough to cover all of the basic necessities and allow for a decent quality of life, which might be nice. (Did any of us ask to be born?)

    My public pension along with my supplemental 457 plan is twice the amount of my spouse’s SS benefit along with his tiny DB carpenter’s pension. (And, my public pension is very modest, compared to those in the $100,000+ Club.)

    Perhaps you priorities for reform are all wrong. Why don’t you throw in with the group that is working to provide DB pensions for all private sector workers, to supplement their SS benefits, and increase their respective qualities of life.

  11. Charles says:

    Fake Rex ther Wonder Dog!
    November 2, 2010 at 1:54 pm
    “And for every $1 spent processing the extra paper work the state would save $100K.”
    Please explain.

    Ed wrote “when benefit accruals were raised over the past decade or so in California, they were raised retroactively. Reversing them would simply be correcting the illegality of that act.”
    Retirement benefits were raised retroactively 17% in 1970. Why didn’t anyone raise these issues then? After all, California was in a recession at that time.

    ED “If you do an apples-to-apples comparison between Social Security and California’s public sector defined benefits…”
    It proves nothing. You can not do an “apples to apples” comparison. Calpers and SS are completely different animals. SS is designed as a safety net, not retirement by itself. SS takes 13% of your salary. Calpers has historically taken 20 to 23%. Nothing new or hidden here in the last 40 years I know of. Plus, the State can’t raid Calpers, as the Federal Government has done to SS as Standard Operating Procedure for decades.

    I have an idea. Instead of a race to the bottom for everyone, why not a race to the top? Why not face the fact that private business and corporations the banks and Wall St. colluded to take away private sector workers security for their own profit? And then for obscene profits destroyed your 401ks. And then got obscene bonuses while being bailed out by the Feds? Why not admit private workers at least in part went for it because times were good and wages were high?

    In the short run the tortoise will never beat the hare, however on the long run…

  12. Charles says:

    SeeSaw
    “Perhaps you priorities for reform are all wrong. Why don’t you throw in with the group that is working to provide DB pensions for all private sector workers, to supplement their SS benefits, and increase their respective qualities of life.”

    An intelligent, reasonable, fair and succinct comment.

    Mr. Ring, did it ever occur to you that you are looking at this subject upside down?

    If private has already lost DBs and public does also, where does all that money go? We know where all the SS siphoning went.

  13. oz says:

    Ed-

    In fairness to Social Security…

    A married worker (and their non working spouse) who has earned close to the SS ceiling for any 35 years of work stands to collect:

    ~35k/yr at age 62,
    ~45k/yr at age 66/67
    ~55k/yr at age 70

    Fully COLAed, unlike CALPERS. And all the working while providing a typically better (and very importantly Fully COLAed) disability benefit.

    And that’s the highest income tier, which provides the lowest benefit in terms of replacement. I’d much rather have SS in its current configuration than CALPERS with your 1.25% multiplier.

    But then again you see deflation coming and staying around…

    I don’t.

  14. SeeSaw says:

    Those who think that the retroactive pension enhancement in 1999 was illegal, should at least give consideration to reading the AG’s Amicus Brief, in defense of CalPERS beneficiares, who received those enhancements. In that Brief, it is told that all defined benefit pension enhancements, adopted in the State of CA, were adopted that way by the CA State Legislature, for the entire existence of defined benefit pensions in CA–97 years. The Moorlach suit, to roll back the 1999 enhancement, has lost in court twice, up to this point. I have yet to see anything on these comment threads, by those who continue to claim the retroactivity was illegal, admitting that they have read the Brief from the office of the AG. At least read it for god’s sake–you might learn something about CA’s defined benefit pensions that you did not know before.

  15. Editor says:

    Oz: With respect to the average rate of base pay being $65,100 per year, I’d be surprised if you are challenging the accuracy of the figures I’ve referenced from the U.S. Census Bureau, so I have to assume you are challenging the assumptions I make with respect to these figures – so I’ll examine them one by one:

    (1) The base payroll figures used include part-time workers. This could impact the calculation of benefits, to the extent part-time employees don’t receive benefits. That would require further analysis. But I have to assume the rate of pay for full-time employees is at least equivalent to the rate of pay for part-time employees, and unfortunately, while the data provides headcounts divided between full-time and part-time employees, it only provides payroll information for the combined groups. But I think my assumption that pay rates for full time employees, on average, are equal or greater than pay rates for part time employees, takes care of this.

    (2) Also, the base payroll figures, while they don’t include any benefits, do include bonuses and overtime. Does this skew my assumptions regarding the base on which benefit overhead is calculated? I don’t know for certain, of course, but I’m not sure it does. It may reduce the value of the vacation differential, but we’ve minimized that anyway. I assumed that other current benefits are the same between the public and private sectors, which, by the way, is a hugely conservative assumption, so I don’t believe that isn’t a factor. As for retirement pensions, you might suggest that the pension contribution is not properly accrued based on a salary average that is inflated by overtime and bonuses, whereas I would counter that if there is any year when bonuses and overtime are definitely maximized it would be the final year of a public employees career, when the base for pension calculations is set.

    So I am at a loss. Please help me here. I really do want to put forward accurate data, and if we can finish this proofing, I will add corrective notes to the conclusion of the post.

  16. oz says:

    1) You’ve hit on a major problem here, and one that both sides use to inflate or deflate their numbers as they see fit. The benefits for part time gov’t workers (the largest group of which is composed of substitute teachers) are rarely more than SS. Thus, when factoring them in as full time equivalents, your benefit average should be significantly lowered. It would take a very comprehensive and exhaustive study to get an accurate number on this, though, but I think it’s safe to say you can lower your gov’t benefits comp value numbers somewhat based on this.

    2) As to the 65k… You can’t take March numbers and multiply by 12! Right around half of your public workers are educational (see the breakdowns in the charts you posted). So most of these employees will receive none/reduced pay for 2-4 months of the year.

    You may say this is ridiculous, because the employees are not working, but if you are going to compare yearly compensation you need to be accurate.

    Furthermore, many private sector jobs including private school teachers, preschool teachers, fishing, timber, etc. are very seasonal, and again, both sides use the seasonal workers and their benefits or lack thereof to help make their claims.

    This is why an apples to apples comparison is the only way to go. You can try to find 12 month data and do our own exhaustive study trying to capture every part time worker, but I think you’ll meet with frustration. If you do an internet search you’ll see the BLS takes boatloads of criticism on its seasonal worker statistics. Whatever you decide to do, I think you now see that stating that the average CA state and local public gets 65k/yr in pay is not correct and misleadingly high.

  17. Charles says:

    Oz
    In fairness to Social Security…

    A married worker (and their non working spouse) who has earned close to the SS ceiling for any 35 years of work stands to collect:

    ~35k/yr at age 62,

    Where does this come from? I have paid into SS for 45 years the last twenty over or near the top and have been told I will get 1700 per month at 62. Does my wife get a separate check?

    ED
    Also 65K per year in pay alone, or are you including benefits? Janitors and secretaries are making about 30K and the professional middle people are making about 50K. Some like me made considerably more but we were few and far between.

    Also, you need to make a distinction between California State and local government employees.

  18. Fake SkippingDog says:

    “And for every $1 spent processing the extra paper work the state would save $100K.”
    Please explain.

    ==================
    I was just pointing out that even if there was a ton of extra paper work, and more people were needed to process that extra work, the savings for every $1 of cost to process the extra work would pay for itself exponentially in savings, if the plan for savings were actually implemented.

  19. Fake Rex ther Wonder Dog! says:

    The MAXIMUM amount that can be collected from SS is just under $31K, and that is not at age 62, but 67.

  20. Charles says:

    Fake SkippingDog
    “I was just pointing out that even if there was a ton of extra paper work, and more people were needed to process that extra work, the savings for every $1 of cost to process the extra work would pay for itself exponentially in savings, if the plan for savings were actually implemented.”

    My point had nothing to do with the cost of processing paperwork. I was pointing out the loss to the State in senior employee value. Experience, training and knowledge built up over decades.

    State Agencies and their Departments have already had their wrists slapped for not having plans to replace employees which will occur due to simple demographics, much less than those caused by some of the ideas of Mr. Ring being implemented.

  21. boprn says:

    “Fed to buy $600 billion in bonds to aid economy”

    http://news.yahoo.com/s/ap/20101103/ap_on_bi_ge/us_federal_reserve

    Been away for a few days, but some will understand the significance of this article. Basically nobody will buy more worthless U.S. paper, and now the govt is so broke it says ‘can the left hand borrow from the right hand?’.

    This will lead to substantial inflation, especially when coupled with the ludicrous idea of lowering interest rates even further (is there a negative fed rate?).

    When inflation kicks in high gear, and those with 401k accounts see their perceived value sky-rocket, we in the public sector will be sure to bash those fat 401k retirements while we are stuck with a defined benefit that can’t be increased.

    There are at least two or three people on these boards who should understand this…its not that complex.

  22. oz says:

    Fake Rex-

    I have educated myself.

    You should read the prior comments before you jump into blog posts and waste other people’s time.

    I ‘m mentioning a worker together with their non working spouse (who gets an additional 50%)

    Please go hop into another random blog like you’re famous for.

  23. oz says:

    I’m with you, boprn.

    Ed just doesn’t seem to agree.

    I’ve read his arguments for deflation and I just don’t get them.

  24. Fake Rex the Wonder Dog! says:

    Fake Rex-

    I have educated myself.

    You should read the prior comments before you jump into blog posts and waste other people’s time.

    ==============================
    Oh, nice back tracking after I corrected your false statement.

    You need to learn the facts before making comments that lack factual support.

    You can thank me later.

  25. oz says:

    Fake Rex-

    Just learned about the benefit for non working spouses (which I did mention before)
    didn’t you? Reading is a powerful thing.

    Glad I could help educate you.

    You and your spouse can thank me later.
    Just be sure to thank my children and grandchildren also,
    when the coming inflation hits to pay for it all.

  26. boprn says:

    “Stocks surge a day after Fed reveals stimulus plan”

    http://finance.yahoo.com/news/Stocks-surge-a-day-after-Fed-apf-3673030832.html?x=0

    Stocks going up as a result of a weakening dollar. Seems I heard someone say something like that – OH WAIT – it was me.

    Oz, get ready to start bitching about the private sector employees and their fat 401’s. About two years from now they are going to be uber rich (at least they will think they are) as their stocks will keep them up with inflation. In the mean time if you haven’t retired from a defined benefit plan, you will be falling behind quick – after all it is DEFINED. Can’t get rich there…

    Let’s see if we can get a head start on this thing…I’m tired of supporting the private sector via inflated prices. They could be easily be replaced by outsourcing their jobs to India. Why do they get employer match on 401s? NO (that would be zero) govt workers in California get a match. I say cut prices at the stores and don’t match. The Tough Loves of the world shouldn’t be supported by our dollars. CUT THE 401K MATCH NOW.

    Sounds pretty absurd, doesn’t it?

  27. Editor says:

    Inflation vs. Deflation – that remains an open question in my opinion. We agree there is nowhere for interest rates to go. Where we aren’t connecting is the threat to liquidity when the value of collateral collapses. Here is an example of a deflationary tsunami that could blindside us – this guy did a lot of research:
    http://seekingalpha.com/article/207391-the-deflationary-impact-of-the-coming-u-s-commercial-real-estate-bust

    Another bubble about to pop is Chinese real estate – I provide plenty of examples in this post:
    https://civicfinance.org/2010/06/08/the-china-bubble/

    In that post is an attempt to convey the difficulty stimulating inflation when you have a collapse of collateral: “collateral is wealth; collateral is currency; the ability of collateral – asset value – to create purchasing power simply dwarfs the impact of national fiscal and monetary policies – especially in the short run. Think of a nation’s fiscal and monetary policies as the helm and the rudder of a giant ship. Think of collateral as the ship itself. Point the ship at an iceberg for a thousand miles, and try to stop the collision when the ship is on a direct heading and 1,000 feet away. It can’t be done.”

    It is difficult to imagine how we can print money and lower already ultra low interest rates at a faster rate than the value of collateral plummets. People have got to come up with cash to make up the difference between what their de-bubbled assets are now worth, and what they have staked as collateral on their loans. That amount of money simply dwarfs the amount being injected with the printing presses. It is a razors edge – the only way to stop deflation is to risk hyper-inflation. The one thing working in our favor is the relative resiliency of the U.S. economy compared to Europe and China. That buys us a few years to sort this out.

  28. boprn says:

    Ed,

    I think we have a bigger chance of becoming a mini Zimbabwe, than having deflation. With the world looking at our currency as a joke, and the petrol dollar in serious jeopardy of being replaced, we are in serious trouble. Every 35$ that gold goes up knocks the real value of the dollar down another penny or so (depending on how you look at it).

    As for SeekingAlpha – been a long time subscriber, and in general terms their articles on whole agree with the inflation outlook.

    But what I’m curious about, is if there is run away inflation, will you support higher pensions for those receiving defined benefit pensions due to the loss of buying power?

    If you think I’m trying to turn the tables on you, your right. Might be healthy to look at things from a different PERSpective (pun intended). I am already forced to, being a govt employee and having a business.

  29. boprn says:

    OZ,

    Maybe we should start posting all the articles that support the position that defined benefit pensions may fall short of adequate in retirement. There are plenty of sites out there bashing people who still have pensions coming (pension tsunami being chief of them).

    Maybe a site that details the greed and corruption of the CEOs in the private sector, and how it cost livable retirement pensions for their employees is in order. I’ve made a few websites in my time…maybe a new site is the ticket. Maybe CIV FI’s editor would be kind enough to make the art, although I am still trying to figure out just WTH that is at the top of this page….must have been some good stuff.

  30. Editor says:

    Boprn: I think the 12 suggestions in this post provide useful ideas for pension adjustments. One of the reasons existing pensions are not tampered with via any of these suggestions is because reducing future retirement benefits causes no immediate harm to the economy, whereas reducing current retiree benefits arguably would – despite the fact that would help balance budgets. And as you know, with respect to inflation, most plans abandon the 2% cap on COLAs once the purchasing power of the benefit declines below 75-80% of what it was worth in the first year of retirement.

    To directly answer your question “will you support higher pensions for those receiving defined benefit pensions due to the loss of buying power?” I think the ceiling of 75% of final salary (unspiked) and the ceiling of 2x or 3x what would be available under the social security formula could also be a floor, in the event of high inflation. (Of course if Oz is correct, and we are somehow underestimating the actual value of the social security benefit – I’m skeptical but need to look into that – then 2x or 3x as a ceiling/floor would have to lower to 1.5x or 2x.)

    In general, if everything suggested in this post were implemented, I believe we would have a financially sustainable program of retirement security for public employees that would retain the defined benefit. That’s something, given the momentum to replace it entirely for new hires with a 401K.

  31. boprn says:

    Ed,

    I am willing to address your 12 points in order IF you tell me one thing – what is that banner at the top supposed to be?

    Seems like a fair deal to me.

  32. Editor says:

    Boprn: The banners rotate, so I cannot know which one you are viewing. They are abstract designs featured merely to add life and color to a topic that is stereotypically dull and drab. But thank you for asking.

  33. oz says:

    http://retirementliving.com/RLstate1.html

    This states that there’s no tax on SS benefits in CA.
    But yet ALL State pension income is fully taxed.

    Is this true?

    If so, what exactly are you guys trying to pull over on your state employees?
    …Many of whom can’t even get into SS.

    If this is true, I don’t see how you can complain when they leave the state upon retirement
    and take their public sector pensions elsewhere.

    I think you need to rethink many of your reform positions.

  34. boprn says:

    OZ,

    You bring up a good point – the process has been slanted against retired govt employees for some time. As a result the market gains that CalPers has made over the last approx 80 years are finding their way to other states.

    Why is it that private sector employees, with their gold plated social security get preferred treatment when it comes to income tax? Many of us (me included) do not get SS, having to solely rely on the heavily taxed pension of CalPers. This preferential treatment of private sector retirees over govt retirees is something that should be looked into. If this were to be resolved, California would keep the income from these individuals in state – where it belongs.

  35. boprn says:

    Editor,

    Your 12 points, numbered & responded to:

    (1) I agree that pension formulas can be lowered for new hires, however, if you were to lower pensions to these amounts the govt would have to put a lot of these people into social security. Currently about 40% of state level govt employees are not participating in SS. Lowering the benefit amount may sound good to you, but the increased cost to the taxpayers of funding SS for those who aren’t in it now would create a large budget hole. So while your idea has merit, it is very expensive. Perhaps no SS with a 2.5 @ 55 formula for safety members.

    (2) A lot of employees would actually agree with you that percentages going forward need to be reduced. The amount they need to be reduced is where the discrepancy would be. That said, you can’t change the old years because a lot of people have bought time out of pocket.

    (3) Your idea of switching some of these people back wouldn’t work. Some of these people went from a pension AND social security to just a pension when these things changed. The state saved a lot of money not paying into SS for these people the past ten years. To revert this group back would mean they have been denied their social security at a later date. Trying to ‘reverse’ things like this would lead to a whopper of the bill to the state/counties/cities to make up for SS they did not pay in.

    (4) Spiking occurs at the County/City level. At the state level you cannot cash out time to spike your pension. The counties/cities need to change their laws to prevent spiking. It makes the system unstable for everyone.

    (5) Spiking doesn’t occur so much from a higher paying job in the last year as cashouts being used as part of the base to calculate pension payouts. In addition, many state employees have given up raises under the agreement that their pensions would be based on the highest 12 months of pay. They were willing to work for less during tough budget times with the understanding they would make it up during retirement. Contracts are a very American thing – you don’t hate America, do you?

    (6) Agree – 75% is fair. Tying it to SS is just a pension envy issue and honestly – strange. SS has a max payout because there is a max deduction. There is no max PERS deduction from an employees check.

    (7) Agree with you. The ages you state are fair. There would be more police and fire medical retirements as a result due to ‘fit for duty’ issues as people get older, but most would be ok until 55. Just have to be aware that there would be more medical retirements.

    (8) NO WAY. That is just nuts. Penalize people for work? And it shouldn’t be done for those who get SS either. Its…dare I say it…communist.

    (9) How come its ok to have tax free SS in California, but public pensions can’t be tax free? This is why a lot of govt retirees move out of California, they keep getting treated like crap – why put up with it?

    (10) So the guy who spent 20 years in the military, and then works for the govt for another 20 should be penalized because he worked hard to earn a decent retirement? You been pictured with Obama lately? Socialist.

    (11) No doubt CalPers and others have taken on too much risk the last few years. Going 80% into annuities seems a bit much. Maybe 50%? The state has enjoyed the rewards of the stock market via retirees discretionary income for the last 80 years – discretionary income that would not exist under your forumula. Just because we have a few bad years, your willing to change what has worked for so long?

    (12) And finally to #12… You know, what exactly is 50%. Seems like a simple question – right? Employees have given up pay raises, and the employer says ‘we will put more of your PERS contribution away for you to make up for it’. Well, that means the employee is paying for it, just via another route. Or..we could raise an employees pay 5% and tell them ‘now you have to pay 50% of PERS’ – which just happens to come out to the 5% raise. Its just juggling numbers, and meaningless in the end. Its not worth focusing on. A great example of this is what the moron we have for Governor did with CHP. He gave them a raise, and said CHP had to fund part of their medical in retirement. CHP now has a 1% deduction going to fund that. Just a shell game.

    ——-

    As a side note –

    Currently 1/3 of people in California are on welfare. The cost if HUGE. A lot more than the state payroll for the employees who provide those benefits to the welfare crowd. You don’t hear much about that from the moron governor, from David Crane, from the OC Register. You hear about the ‘outrageous’ cost of public pensions from them. Public pensions that have existed in this state for about 80 years. Pensions that cost a fraction of what goes out to welfare. Pensions that go out to people who work for a living, rather than sit at home and watch Jerry Springer & Oprah.

    Have you ever given much thought to why the pension issue has come up, and not the welfare issue? I will give you my take on it. The welfare people are already under control of the govt. People who have pensions, not begging for a welfare check, free medical, and subsidized housing are NOT under the control of the government. These people are still free from the potential socialistic grasp of the democratic party. But that’s not where it ends. The republican party has its part too. The large pension deposits in PERS systems throughout the county are a target to plunder (to borrow a term from Steven Greenhut) for the republican party. The party that brought you Bush and Schwarzenegger (enough said there). Government employees are the target of both parties, for different reasons…and neither party talks much about the massive welfare, the cost of illegals, cost of inmate medical. But they sure do talk about pensions people have EARNED.

    What is sad, is you buy the line. You buy the line that a pension for someone who has earned it is unacceptable, while the welfare argument never happens. I expect such obtuseness from Tough Love and Rex, but not from someone with so much experience. Anyhow, 12 points responded to & a piece of my mind…a small piece.

    Look forward to your response. Keep it short. LOL =]

  36. Editor says:

    Oz: I’d like to understand something you brought up regarding social security for spouses – here’s the comment you made:

    “Your wife can get an additional 50% of your check based on your earnings
    if she desires even if you are drawing.
    http://www.ssa.gov/retire2/yourspouse.htm#drc

    And here are some relevant quotes from the link you provide:

    “If you or your spouse are full retirement age:
    If you are full retirement age, you can apply for retirement benefits and then request to have payments suspended. That way, your spouse can receive a spouse’s benefit and you can continue to earn delayed retirement credits until age 70. If your spouse has reached full retirement age and is eligible for a spouse’s benefit and his or her own retirement benefit, he or she has a choice. Your spouse can choose to receive only the spouse’s benefit now and delay receiving retirement benefits until a later date. If retirement benefits are delayed, a higher benefit may be received at a later date based on the effect of delayed retirement credits.

    If your spouse worked:
    If your spouse is eligible for retirement benefits on his or her own record we will pay that amount first. But if the benefit on your record is a higher amount, he or she will get a combination of benefits that equals that higher amount (reduced for age). It doesn’t matter if your spouse starts getting benefits before, after, or at the same time you do–we will check both records to make sure your spouse gets the higher amount. If your spouse continues to work while receiving benefits, the same earnings limits apply to him or her as apply to you. If your spouse is eligible for benefits this year and is also working, you can use our earnings test calculator to see how those earnings would affect your spouse’s benefit payments. (Your spouse’s earnings affect only his or her own benefits; they do not affect your benefits or those of any other beneficiaries on your record.)”

    Based on this information, I think it is a stretch to suggest that, on average, social security is going to pay us 150% of what we anticipated. For that to occur, you would have to have a spouse who never worked, or made almost nothing in the job where they did work – and for virtually all of us, that is no longer the case. I guess in an apples-to-apples examination of what the average social security benefit is worth, you would have to make an allowance for this, but I don’t think it would change the overall numbers very much.

    To excerpt from my earlier comment on this:

    “If you do an apples-to-apples comparison between Social Security and California’s public sector defined benefits, the average social security recipient gets a benefit that would represent about a 0.7% accrual per year. So 1.25% is considerably better than that.

    If if you are a public employee, and you work for 40 years, which is the norm for private sector workers, at 1.25% per year you will get 50% of your final salary in the form of a pension.

    Here’s what a social security recipient will get, as a “percent of recent average annual income” (ref. http://www.vaughns-1-pagers.com/economics/ssa-monthly-payments.htm) if they retire at age 66, meaning they probably worked for 40 years:

    At a recent average annual income of $15K, they will collect $8.1K per year, or 54%.

    At a recent average annual income of $25K, they will collect 10.3K per year, or 41%.

    At a recent average annual income of $35K, they will collect $12.6K per year, or 36%.

    At a recent average annual income of $45K, they will collect 14.8K per year, or 32%.

    As Social Security is progressive, unlike public employee defined benefits, it goes down sharply from there, so that, for example, at a recent average annual income of $75K, they will collect 20.9K per year, or 27%.

    It is unlikely any full-time public employee in the entire state of California makes less than $20K per year, which means that virtually ALL public employees, accruing defined benefits at a rate of 1.25% per year, will collect MORE in retirement than they would have under social security.”

    I don’t think social security’s spousal benefit, which only applies if the spouse never worked or made far less than their counterpart, will seriously change that conclusion. Similarly, the California tax rate on the maximum social security benefit or ($35,148 per year) is only $1,263 – that’s nice, but doesn’t move the bar very much.

    For example, to earn a social security benefit of $35,148 per year, your “Estimated Recent Annual Income” (ref. http://www.vaughns-1-pagers.com/economics/ssa-monthly-payments.htm) has to exceed $150,000 per year, and you have to retire at age 70 to collect that much. A public employee, accruing their pension at a rate of 1.25% per year, by age 70 would probably have worked for about 45 years, meaning they would get 45 x 1.25% or $84,375 per year – even if you apply the 50% amount and add back state taxes ($1,435, ref. http://www.ftb.ca.gov/forms/2009_california_tax_rates_and_exemptions.shtml), you are comparing a social security benefit of 54,157 to a pension of $84,375. At an accrual of 2.0% per year, that pension expands to $135K, and at the grossly unsustainable 3.0%, that pension expands to $202K per year.

  37. oz says:

    Ed-

    The Vaughns link does not come up for me,
    but the max SS income threshold for payments
    is only ~106k, so I don’t know where the 150k comes from.

    Also one does not need to actually hit the
    threshold, but just come close to it to
    get 95% or so of the max. A 90k income
    would do it.

    Keep in mind, too, that one does not need
    to retire at 70 to get that much, one
    just needs to start collecting their share
    at 70. 35 years is 35 years.

    One can actually collect the spousal benefit
    at 62 and wait till 70 to collect the other.
    If you do an internet search you’ll see that
    there’s quite a few ways to game SS using this.
    Sidenote: it is also possible to collect a
    spousal benefit off an ex-spouse without their
    knowledge. Thus one worker’s history can support
    3 or 4 annuity checks.

    I think the spousal benefit itself shows that
    it really isn’t a good idea to compare SS and
    public pensions, since SS is really to provide
    a baseline standard for all, whereas the other
    is intended to be an earned benefit. But you
    seem to insist on comparing the two, so I’ll
    continue to indulge.

    Do you think your pension tsunami crowd will be
    posting a list of SS recipients earning over
    100k in a few years? We’re past 70k
    now just for a couple, families are even higher.
    It’s coming… I guess we’ll see how fair you guys
    really are.

  38. boprn says:

    Gold has set a new record (1412$/ounce). This of course devalues fiat currencies. Devalued fiat currencies means the cost of goods will go up. That is called inflation. Stocks go up wildly in an inflationary environment. That makes paying defined benefit pensions very affordable, as the rate of return will easily beat projections in an inflationary environment. Of course the losers are retirees stuck in defined benefit pensions (to the tune of 25% of the monthly pension amount).

    At least those with 401k’s will be making out in the future.

    Hope enough dots were connected there for the simpletons of the world. Tried to keep the sentences short.

  39. Editor says:

    Boprn: Wasn’t it you who checked on the “stop loss” provision that protects pensioners from inflation once the pension benefit falls to 75% of the inflation-adjusted value it had in the first year of the beneficiary’s retirement?

  40. boprn says:

    Editor,

    Yes it was me who posted that. Its not for the 1st year, but over the life of the pension. ‘Buying power parity’ is what I called it. In the post above, I mention “Of course the losers are retirees stuck in defined benefit pensions (to the tune of 25% of the monthly pension amount).”

    So defined pension benefit pensioners will lose 25% under an inflationary stock market (supposing the inflation also shows up in the CPI). Those with 401k type pensions should see their 401k keep up with CPI – thus they will be the ones with the advantage in this scenario.

    Pendulum swings both ways is my point, and when it had swung hard to the private sector employees advantage in the 80’s and 90’s you didn’t see newspapers, television, and so on bashing the retirements private sector employees got. Its just when the public sector has it swing in their favor is there a problem.

    The aforementioned is why the public employee pension bashing sucks. Not saying you do it, your articles are more fair/balanced (perhaps your a FOX news guy), but a lot of others do.

    =]

  41. Charles says:

    I will simply accept my well earned $90,000 per year retirement and my $20,000 per year SS in about a year and a half.

    A person should get something for decades of work.

  42. Rex The Wonder Dog! says:

    You didn’t “earn” your pension, you ripped it off from taxpayers with bogus, illegal retroactive pension increases (can you say SB400??).

    Lucky for taxpayers CalTurds is only 46% funded and will be broke in 20 years, and pension haircuts will be given out to you and everyone else!

  43. Tom Massey says:

    There are many good cops, but they dare not rat-out their corrupt colleagues. Our entire government has become the same way. A THUGGERY.

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