In the March 19th, 2012 issue of the New Yorker magazine, as part of a full-page advertisement for MSNBC, there is a quote from Rachel Maddow that I couldn’t agree with more. She says:
“Social security isn’t a Ponzi scheme. It’s not bankrupting us. It’s not an outrage. It is working.”
Rachel Maddow is absolutely right. In one of several attempts to compare the costs, benefits, and solvency of social security to public sector pensions, in the post from November 2011 entitled “Merge Social Security and Public Sector Pensions,” I concluded the following:
“If one strips away the reliance on investment returns and compares social security to public sector pensions based on payroll withholding from current worker’s providing 100% of the funds required to make current payments to retirees, it quickly becomes obvious that public sector pensions are completely unsustainable, whereas social security can be rendered permanently solvent with relatively minor tinkering.”
The reason for this is simple enough: Social security, on average, collects about 12.5% of someone’s annual earnings for about 40 years, then when that someone retires in their mid-sixties, it pays back about 33% of those earnings for about 15 years. Public sector pensions, by contrast, on average collect not quite 20% of a government worker’s annual earnings for about 30 years, then when that government worker retires in their mid-fifties, it pays back about 75% of those earnings for about 25 years. Do the math.
Compared to public sector pensions, along with having far more proportional funding inputs vs. outgoing payments, Social security is progressive, meaning that the percentage of earnings that are delivered as payments in retirement are less if someone made more money. The social security benefit is also capped at around $32,000 per year, unlike government worker pensions.
For these reasons, to keep social security solvent as America’s population ages, a few minor adjustments are all that is necessary – increase the amount of the contribution by a few percentage points, implement means testing, and raise the ceiling on withholding from the current $108,000 per year to $250,000 per year or more. Is Rachael Maddow as incensed as I am that instead of maintaining the current required contribution at 12.5% of payroll, it has been recently lowered to 10.5%? Why are our policymakers trying to destroy one of the most financially stable systems of retirement security in the world?
When it comes to retirement security, where Rachel Maddow might shine some of her famous indignation ought to be on what is, if not a Ponzi scheme, one of the most egregious transfers of wealth from the disenfranchised to the privileged in the history of America – the public employee pension scam. Because this is a story of everything Maddow ought to hate – privilege, corruption, Wall Street wealth, and government collusion with corporate monopolies. Across the United States, cities and counties and states are going bankrupt to pay tithe to Wall Street Brokerages to fund government worker pensions.
Here is a simple equation that anyone opining on sustainable retirement security in America ought to study and memorize:
(public sector pensions) 1.5S x 67% x 30% > S x 33% x 70% (social security)
In this equation, “S” refers to annual salary, which on average is 50% higher for government workers than private sector workers. The middle variable, 67% for public sector pensions, and 33% for social security, refers to the percent of salary that is recovered as a retirement payment. Government workers typically retire with two-thirds of their salary paid in the form of a pension, private sector workers typically get about one-third of their salary paid in retirement by social security. The final variable, 30% for public sector pensions, and 70% for social security, represents the percentage of America’s retired population receiving a public sector pension, 30%, vs. receiving social security, 70%. It is important to point out that actually government workers only comprise 20% of our workforce, but they comprise 30% of our retired population because they retire, on average, ten years earlier than private sector workers.
If you run these numbers, this equation proves that as a nation, we are already spending more in payments to retired public sector workers each year than we pay in social security to the entire remaining retired population. This is an absurd injustice to taxpayers and a crippling drain on government budgets.
What Rachel Maddow and other liberals might consider, along with every fiscal conservative who stops short of being a full blown libertarian, is that there is a centrist perspective to the challenge of providing retirement security. This perspective indicts not only Wall Street, who is by far the biggest beneficiary of the wealth accumulation represented by public sector pension funds, but also the public sector unions, who have put their government worker’s agenda in front of their financial better judgement or the broader interests of the private sector working class. The idea that over $4.0 trillion in invested public sector pension funds will earn over 7.0% per year, long-term, to fund public sector pensions – when the federal reserve is lending money at essentially zero percent interest – is an absurd lie. Public sector pensions are bankrupt. Period.
The solution to providing retirement security in America is to retain the taxpayer funded safety net called social security, but provide that benefit to ALL workers, public and private. If public sector workers desire and deserve more compensation for their work, it can take the form of higher base pay. They can then eliminate debt and wisely save for their retirements, a process that will join them in empathy and experience with the rest of us.
What do you say, Rachel?
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Inquiring readers are invited to review the calculations and data offered in these related posts:
Senator DeLeon’s Universal Retirement Security Act – March 3, 2012
Government Workers vs. Self-Employed: A Financial Comparison – February 24, 2012
Pricing A Taxpayer Bailout of California’s Pensions – February 24, 2012
Preserving America’s Middle Class – February 8, 2012
America’s Forgotten 33% – January 8, 2012
How Wall Street Bought the Public Employee Unions – December 12, 2011
Merge Social Security and Public Pensions – November 29, 2011
Government Pensions Increasing Hedge Fund Investing – November 1, 2011
Public Safety Compensation Trends, 2000-2010 – October 14, 2011
How Interest Rates Affect the Federal Budget – August 4, 2011
The Impact of Pension Spiking – July 24, 2011
What Percent of Payroll Will Keep Pensions Solvent? – July 23, 2011
Why Pensions Are Grossly Underfunded – June 27, 2011
Preserving America’s Retirement Security – June 4, 2011
Why Real Rates of Return Must Fall – May 16, 2011
How Rates of Return Affect Pension Contribution Rates – April 27, 2011
How Rates of Return Affect Required Pension Assets – April 7, 2011
The Cost of Government Pensions – March 11, 2011
California’s State AND Local Government Personnel Costs – February 17, 2011
When is Debt Unsustainable, February 4, 2011
What Percent of Payroll Will Keep Pensions Solvent?,” July 23, 2011
Why Pensions Are Grossly Underfunded - June 27, 2011
Preserving America’s Retirement Security - June 4, 2011
Government Worker Understates Average Pension - May 31, 2011
Why Real Rates of Return Must Fall - May 5, 2011
How Rates of Return Affect Pension Contribution Rates - April 27, 2011
Require CalPERS to Invest 100% in California? - April 14, 2011
How Rates of Return Affect Required Pension Assets - April 7, 2011
The Cost of Government Pensions - March 11, 2011
When is Debt Unsustainable? - February 4, 2011
China’s Economic Challenges - December 28, 2010
The Cost of Retirement Security in America - December 23, 2010
National Debt and Rates of Return - December 18, 2010
Teacher Pension Solvency - December 12, 2010
Entrepreneurial vs. Casino Capitalism - November 11, 2010
Pension Reform Options - November 1, 2010
Pensions: Giant 401K Plans - September 14, 2010
Sustainable Retirement Finance - September 11, 2010
Avoiding Global Deflation - July 18, 2010
The Axis of Wall Street & Unions - July 8, 2010
The China Bubble - June 8, 2010
Funding Social Security vs. Public Pensions - May 22, 2010
Social Security Benefits vs. Public Pensions - May 8, 2010
The Razor’s Edge – Inflation vs. Deflation - March 15, 2010