Social Security Isn’t Insolvent, Public Pensions Are

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?

*  *  *

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

The Impact of Tax Exempt Pensions – September 23, 2011

CalPERS Projected Returns vs. Reality
– August 13, 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

3 comments to Social Security Isn’t Insolvent, Public Pensions Are

  • Isthat

    More mindless opinions. For the purpose of this post, I will assume that you are a Republican – only Republican’s be so obtuse.

    The Republican party suggested during the Shrub years that Social Security dollars should be invested in the general stock market so that seniors could retire ‘big – Texas big’. The argument of the ignorant folk (Republicans) was, at the time, that if SS dollars had been invested all those years that the ‘average individual SS account’ would have roughly a million dollars in it. SS retirees could live like kings they said. Perhaps it would be closer to the truth to say they could have retired like some lower level Earl of a bygone era.

    The really cool thing (sarcasm intended) about PERS programs around the country is that they DO invest in the market and dollars grow. You see, this renders your comparative percentages meaningless. They are so devoid of merit, that even you should have posted it. Then there is the (LOL) statement of public employees pay being 50% more. While the benefits are more, the pay is the same (on a job vs job basis). That’s not to say that the average govt employee doesn’t make more than the average private employee. OF COURSE THEY DO. The govt doesn’t have Wal-Mart, McDonalds, and so on. The govt, for the most part, is a professional class that has a higher pay basis. But you, and your little clan of haters, like to throw out pointless numbers in an attempt to inflame the less than educated readers of this blog.

    Luckily, hardly anybody reads your little blog – but the haters.

  • Editor

    Isthat – it is always good to read your generally insightful, and always pithy, comments. Believe it or not, I am not a registered Republican. Henry Hyde and Kenneth Star got me out of the Republican party back in 1998. Ronald Reagan got me into the Republican party back in 1981. For 17 years I thought partisan politics was a way to save America. In my youth I was a liberal Democrat. In my middle age I am an independent. I am neither Republican, nor Tea Party, nor Occupier. I am certainly not a libertarian, nor a socialist. I’m just an American, trying to solve problems, and not getting far. But the problems are daunting, wouldn’t you say?

    I completely agree with you that the Republican plan to sink the entire social security fund into the stock market was a bad idea, but for different reasons.

    Where we disagree is that I think we already have too much taxpayer guaranteed investment in the markets, via the public sector pension funds, and I think amounts invested and backed up by taxpayers at this scale distort and risk destroying the market. That is the crux of our disagreement. The rest is window dressing.

    As an aside, stating the fact that public employee base pay averages 50% greater than that earned by private sector taxpayers is not a value judgement, it’s a fact. I think some jobs in government overpay, such as nearly all non-safety bureaucratic, entry and mid-level positions. I also think many of these bureaucracies are top-heavy, and while the top positions may or may not overpay, they could eliminate a lot of the layers and have fewer top positions. I think the educational bureaucracy is grossly top heavy, and that we could solve our problems financing education if we simply kept 75% of the employees in the classroom, and eliminated about half the non-classroom positions. I think firefighters in most cases in California are overpaid, because literally thousands of applicants try for every open position, but I think that in general, police and prison guards are not grossly overpaid.

    On the other hand, the abuse of overtime and sick time is rampant throughout government. And the size of the pensions and retirement health benefits are completely unaffordable. But that brings us back to the crux of our disagreement: I think that over $4.0 trillion in assets invested by public employee pension funds and backed up by taxpayers at this scale – and at rates of return exceeding 7% per year – distort and risk destroying the market, and you, apparently, do not.

  • Isthat

    Agree with you that the markets are distorted due to the massive amount of investment dollars coming from the public employees retirement systems across the country, but what to do? The dollars have to be put somewhere.

    Agree that there needs to be less management in schools.

    Agree that firemen are overpaid.

    However, I don’t agree that public employees (as a whole) are overpaid by 50%. Some are overpaid, some under, some about right. Right wing news groups always try to paint things with a big fat brush, comparing the average salary of a public employee to the average of private. Again, we go back to the fact that nearly all people who work for the public are in professions. Now days, those who work in the private sector are in mostly service jobs. It is just a matter of type of employment/education that causes the wage disparity.