But CalPERS – the largest of over 30 major government worker pension funds in California, only manages about a third of the the state and local public sector pensions. And CalPERS is basing their increase on a lowering of their projected rate of return for their invested funds by one quarter of one percent, from 7.75% down to 7.5%.

People may debate endlessly over whether or not government worker pension funds in America, now managing over $4.0 trillion in assets, can actually earn 7.5% per year, every year, for decades on end. We have argued repeatedly that this rate of return is impossible to achieve any longer, because (1) high returns in the past depended on debt accumulation, which poured cash into the economy, which stimulated consumer spending, investing, and asset appreciation – enabling more borrowing – all of which caused investment returns to grow at levels that cannot continue now that borrowing has reached its practical limit, (2) our aging population means more people will be selling their investments to finance their retirements – including the pension funds [...] Read More]]> As reported today in Capitol Weekly, in a post entitled “CalPERS ignores Brown, delays pension payment” by Ed Mendel, the amount taxpayers will have to fork over to CalPERS next year will rise by $213 million, to a total of $3.7 billion. Governor Brown, quite rightly, believes the full amount of the necessary increase should have been assessed, another $149 million, instead of being “smoothed” over the next twenty years.

But CalPERS – the largest of over 30 major government worker pension funds in California, only manages about a third of the the state and local public sector pensions. And CalPERS is basing their increase on a lowering of their projected rate of return for their invested funds by one quarter of one percent, from 7.75% down to 7.5%.

People may debate endlessly over whether or not government worker pension funds in America, now managing over $4.0 trillion in assets, can actually earn 7.5% per year, every year, for decades on end. We have argued repeatedly that this rate of return is impossible to achieve any longer, because (1) high returns in the past depended on debt accumulation, which poured cash into the economy, which stimulated consumer spending, investing, and asset appreciation – enabling more borrowing – all of which caused investment returns to grow at levels that cannot continue now that borrowing has reached its practical limit, (2) our aging population means more people will be selling their investments to finance their retirements – including the pension funds whose participants themselves are aging and are retiring with higher benefits than previous retirees – and this puts more sellers in the market, lowering asset values and returns on invested assets, and (3) pension funds are much larger as a percent of GDP than they were in previous decades, and they are now too big to consistently beat the market.

This debate will not go away. But it is at least worth examining just how much it will cost Californians if the rates of return on state and local government worker pension funds drops by 1.0%, 2.0%, or 3.0%. The fact is, they might drop by even more than that. Go to a commercial bank and try to buy a U.S. Treasury bill or certificate of deposit that pays 4.75%. Or examine the returns on the major stock exchanges over the past 10+ years. Yields are well under 4.75%, yet CalPERS has lowered their rate of return by only one-quarter of one percent to 7.5?

What are they scared of? Why not pick a risk-free, much lower rate of return?

The table below shows how much the annual pension contribution as a percent of payroll increases when the rate of return drops. Column one shows the contributions required under the original 7.75% long-term rate of return projection, which has just been lowered to 7.5%. Columns two, three and four show the contributions required under lower rates of return, 6.75%, 5.75%, and 4.75%. The rows show just how much these contributions need to be under various pension formulas. These formulas govern most government worker pensions – the percentage noted, “1.25% per year,” for example, means that if a government worker retires after 30 years, their pension will be calculated as follows: 1.25% x 30 x final salary, or in this case, 37.5% of final salary. The amounts selected for these rows are representative of the following pension formulas:

• 1.25% per year  -  for typical non-safety employees up until around 2000.
• 1.6% per year  -  the average of non-safety and safety employees up until around 2000.
• 2.0% per year  -  for typical safety employees up until around 2000; for typical non-safety employees since then.
• 2.5% per year  -  the average of non-safety and safety employees since around 2000.
• 3.0% per year  -  for typical safety employees since around 2000.

On the table below, row four of the pension formulas, outlined, shows how lowered rates of return will impact the contributions necessary to fund a 2.5% per year formula. Since 2.5% per year is the blended average that would represent all current state and local government employees in California, the results in this row should be of great interest to taxpayers and public employees alike. As can be seen in this case, the annual pension contribution as a percent of payroll must increase from 16.3% at the rosy rate of return of 7.75% to 21.4% (at 6.75% return), to 28% (at 5.75% return), to 36.6% (at a still impressive 4.75% rate of return).

The table above concludes by taking these pension contributions and applying them to the total payroll of California’s state and local governments, which is (using conservative estimates) 1,500,000 employees times an average annual salary of $70,000 per year (ref. U.S. Census, 2010 CA State Gov. Payroll, and 2010 CA Local Gov. Payroll). As can be seen, if the rate of return for California’s state and local government employee pension funds drops from 7.75% to 6.75%, this will cost taxpayers another $5.4 billion per year. If the return projection drops to 5.75%, it will cost taxpayers another $12.3 billion per year. And if the return projection drops to 4.75% per year, it will cost taxpayers an additional $21.3 billion per year. But wait, because the above analysis still understates the problem.

There’s one more big gotcha.

The first table is entitled “Impact of Lowered Return Projections if we could Retroactively Increase Contributions.” But we can’t do that. Contributions that are in the funds currently were made under the assumption that the 7.75% rate of return would last forever. If we lower that assumption, we still have to fund our pension obligations by investing the money we’ve already got, plus whatever additional monies we can collect from now on. This severely compounds the problem.

The next table, below, calculates how much lowered return projections will cause pension contributions to increase, if half of the contributions are already made. This assumes that in aggregate, the participants in California’s government worker pensions are at mid-career. This is an extremely conservative assumption, because there are millions of government workers who are already retired, whose pension payments are equally dependent on investment returns from the pension funds. This next table therefore understates the impact of lower investment returns on the required contributions to the fund from existing workers.

As can be seen in this more realistic, but still very much a best case scenario, if the rate of return for California’s state and local government employee pension funds drops from 7.75% to 6.75%, this will cost taxpayers another $11.3 billion per year. If the return projection drops to 5.75%, it will cost taxpayers another $24.9 billion per year. And if the return projection drops to a still quite aggressive 4.75% per year, it will cost taxpayers an additional $40.8 billion per year.

This is what the pension funds are up against. These are the scenarios the pension bankers exchange in closed meetings, where the press and even their own PR people don’t attend. Imagine if CalPERS admitted, as they should, that their funds cannot reliably expect to earn more than 4.75% per year. It would mean that – assuming all 10 million of California’s households pay taxes, which obviously is not the case – that every household in the state would have to fork over another $4,000 per year in increased taxes.

Critics of pensions and critics of pension reform alike are invited to verify for themselves the calculations made here. To imply, as CalPERS has, that about another $1.0 billion per year, spread among the 30 California government worker pension funds and “smoothed” over the next 20 years, is all it will take to shore up their solvency, is irresponsible. The additional amount necessary to save California’s government worker pensions is probably closer to $40 billion per year, from now until these pension formulas are reduced.

It is difficult to imagine economic thinking more well intentioned yet fundamentally flawed. What private sector unions want, ideally, is to work cooperatively with government and industry to help create well paying jobs. But high speed rail will incur far more economic costs than economic benefits. Massive construction projects, using public/private financing mechanisms, have to benefit the economy. Otherwise they are examples of private gain – high paying jobs for workers who happen to belong to unions involved in the construction and maintenance of the project – in exchange for socialized loss – higher taxes that lower the disposable income of everyone else.

Policy activists who are critical of unions must understand that there are two crucial debates they are engaged in with unions. The first one is an economic argument – convincing union leadership that encouraging free market competition will lower the cost of living for everyone, and that when this happens all workers benefit. This is a tough sell, despite being entirely accurate. But the second debate, which regards what projects unions should be putting [...] Read More]]> The California Labor Federation has a membership of more than 1,200 unions, representing over two million workers. And the first of seven key issues they list on their legislative agenda for 2012 is supporting high speed rail. As they put it, “Building high speed rail will grow our economy and create long-term jobs. An estimated 450,000 jobs in operations, maintenance, ticketing, and services will be needed to keep HSR up and running.”

It is difficult to imagine economic thinking more well intentioned yet fundamentally flawed. What private sector unions want, ideally, is to work cooperatively with government and industry to help create well paying jobs. But high speed rail will incur far more economic costs than economic benefits. Massive construction projects, using public/private financing mechanisms, have to benefit the economy. Otherwise they are examples of private gain – high paying jobs for workers who happen to belong to unions involved in the construction and maintenance of the project – in exchange for socialized loss – higher taxes that lower the disposable income of everyone else.

Policy activists who are critical of unions must understand that there are two crucial debates they are engaged in with unions. The first one is an economic argument – convincing union leadership that encouraging free market competition will lower the cost of living for everyone, and that when this happens all workers benefit. This is a tough sell, despite being entirely accurate. But the second debate, which regards what projects unions should be putting at the top of their legislative agenda, is much easier, because all projects create jobs.

During the great depression, massive infrastructure projects were completed that delivered millions of jobs, but they also delivered amenities to society at large that yielded long-term economic dividends. Hydroelectric dams increased the availability of water for irrigation and the supply of electricity. Rural electrification delivered cheap and clean power to homes and businesses across the country. New roads and bridges resulted in cheaper and faster movement of people and goods. From new school buildings to new civic stadiums, the public/private projects of the 1930′s helped make affordable education and entertainment more accessible to millions. These infrastructure investments put millions of people to work, but they also fundamentally transformed America’s economy, enabling everyone less expensive access to water, power, transportation, education and entertainment.

There is no possibility whatsoever that high-speed rail can compete in California with existing air travel services. It will lose money forever.

The legislative agenda of unions in California should indeed prioritize public/private partnerships to create high-paying jobs, but they should promote projects that will lower the cost of living in California. This is the win-win formula that results in accelerated economic growth and a higher standard of living for all workers, in addition to delivering construction jobs today. Here are examples of such projects – and none of these would cost anywhere near the $100 billion that is the new minimum estimate for high-speed rail:

(1) Build desalination plants off the Southern California coast:
Desalination technology has advanced to the point where it is now possible to desalinate a cubic meter of seawater using less than 2.0 kilowatt-hours of electricity. Put another way, the energy necessary to desalinate seawater is now less than the energy currently required to pump an equivalent unit of seawater over the mountains from the California aqueduct into the Los Angeles basin. Because the California current is one of the biggest ocean currents in the world, the brine that would be discharged as several gigatons of fresh water were recovered each year from seawater would have an insignificant environmental impact. The brine could be discharged through pipes that would run atop the seabed with the outfall 10+ miles offshore where the California current would disperse it immediately. Desalination is a key element towards delivering cheap water again in California, and like nuclear power, claims that desalination is prohibitively expensive are based more on the cost to overcome regulatory hurdles and lawsuits, not the actual construction costs, and certainly not the operating costs.

(2) Develop new surface storage and aquifer storage for storm runoff:
California’s system of reservoirs provide ample fresh water to agriculture, industry and residential/commercial users in years with normal rainfall, but inevitably there are cycles of drought when the existing water storage infrastructure is inadequate. It is probably possible to add another 5 million acre feet of storage without resorting to high dams by identifying areas within the Central Valley where runoff can be collected in great bulk and kept there until spring irrigation draw-downs begin, or systematically transferred to underground aquifers. The capacity of underground aquifers to store water in California is still poorly understood, but California’s water commission estimates there could be 10 million acre feet or more of underground water storage capacity in California. There is plenty of runoff, even in drought years, that isn’t being harvested. To allow California’s agricultural industry access to cheap, abundant water (agriculture consumes well over 80% of the fresh water diverted in California), better storage of storm runoff is essential.

(3) Widen and upgrade interstate freeways:
Along with interstate freeway upgrades, widen and upgrade all major freeways, highways and boulevards in California. Widen and retrofit bridges and tunnels. California needs smart lanes on upgraded roads, not the “bullet train.” As energy becomes abundant and cheap – and technology guarantees this will occur – the most convenient personal transportation appliance ever conceived, the automobile, will become even more indispensable. Cars of the future will be not only clean operating and fuel efficient, but will go faster than ever and be capable of operating on autopilot. To participate in this revolution in transportation, Californians need to upgrade their roads, not attempt to discourage people from using them by neglecting their maintenance, upgrades, and expansion.

(4) Upgrade existing rail corridors:
It is not necessary to develop bullet trains for passenger transportation in a state that will never have more than 50 million people living along an 800 mile corridor. But fast intercity rail, using existing track that is upgraded to tolerate speeds of 120 MPH is a viable proposition, particularly if these upgraded rail lines are also still utilized for faster freight transportation, which will always be more efficient via rail. Diverting public funds into bullet trains is folly, when immediate returns would accrue to investments in better roads and better existing rail.

(5) Streamline permitting process to allow more oil and gas drilling, and more mines and quarries:
California has abundant energy and mineral resources, but nothing can be developed without years of permit applications and legal battles. As a result, basic raw materials have to be imported at far greater cost than necessary. Making development of mineral resources in California more expensive than virtually anywhere else on earth robs Californians of jobs, and constitutes a drain on every facet of California’s economy that relies on these resources.

(6) Build nuclear power plants:
The latest generation of nuclear power technologies are safer than ever, and there is an abundant supply of nuclear fuel within North America. Adding a few nuclear power stations in California would have a dramatic impact on the price of electricity. Claims that nuclear power is more expensive than alternative energy are based more on the cost to overcome regulatory hurdles and lawsuits, not the actual construction costs, and certainly not the fuel costs. Nuclear power development is a key element towards delivering cheap energy again in California.

(7) Build an LNG terminal off the California coast:
Along with new North American sources of natural gas from shale, there is abundant natural gas around the world, and a global market exists for liquified natural gas that is transported by tanker. A few years ago an LNG terminal was proposed to be built fourteen miles off the coast in Ventura County, but was nixed by California’s legislature. By receiving LNG tankers several miles offshore, and piping in the less hazardous gaseous fuel, this terminal would not pose any threat, however remote, to onshore communities, and would allow California to further diversify their sources of this abundant and clean fossil fuel.

By pushing for high-speed rail which will never come close to ever operating at a profit, the current agenda of California’s union leadership is to create more jobs that are essentially parasitic. They will impose new costs to society to benefit a relatively small number of workers, but make everyone else poorer. It doesn’t have to be this way.

California’s union leadership should recognize that by successfully pushing for infrastructure projects that pay for themselves, they can not only create new jobs, but foster long-term economic growth. This, in turn, will enable perpetual job creation. But if they do this, they would have to take on the powerful environmentalist lobby, for whom high-speed rail is virtually the only project they seem to favor.

Union leadership should also recognize that as long as they are unwilling to take on the environmentalists, and push for projects that lower the costs for water, power, transportation – the basic necessities for all consumers – they are doing the bidding of the corporate special interests. These quasi-monopolies benefit from environmentalism run amok, because it means they avoid competition as long as new projects remain on the drawing board. It means they can charge exorbitant prices for commodities that ought to get cheaper every year.

For private sector unions – who value jobs in construction – to remain relevant and forge new partnerships, they will have to divorce themselves from the environmentalist lobby, which has become extreme, and from the public sector union agenda, which prefers to allocate resources to inflated pay and pensions for government workers over investing taxpayer’s money in public/private infrastructure projects.

Related Posts:

Is Union Reform Partisan?, March 30, 2011

Unions and the American Worker, March 25, 2011

Redefining Environmentalism, March 4, 2011

State Politics and Right-to-Work, January 22, 2011

How to Revive California’s Economy, January 18, 2011

California’s Green Godfathers, January 4, 2011

Investigating Climate Alarmism, November 28, 2010

Bullet Train Boondoggles, November 10, 2010

How Unions Can Save America, September 30, 2010

An Environmentalist Agenda for Earth Day, April 22, 2010

Implementing California’s Global Warming Act, April 13, 2010

The Footprints of Rail Traffic, June 23, 2009

“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 [...] Read More]]> 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

As reported in the Sacramento Bee by Jon Ortiz on February 24th “California Democrats push pension plan for nongovernment workers,” and in the Los Angeles Times by Mark Lifsher on February 23rd, “Private-sector retirement savings plan proposed for California,” DeLeon’s bill will require every employer in the state with five or more employees to participate in the plan. If employers already offer a pension plan or 401K plan, they would be exempt.

Plenty of commentators have already weighed in with sobering missives on the many problems with DeLeon’s bill. You can read them in the San Bernardino Press Enterprise, the Pleasanton Weekly, CalWatchdog, CalWhine, and elsewhere. But when DeLeon says his bill “is designed to supplement Social Security retirement benefits,” he is on to something bigger than he may realize.

The goal of taxpayer funded retirement security, whether it is for a retired government worker or a retired private sector worker living on social security, is not to support an affluent lifestyle. A taxpayer funded retirement pension should be a modest amount, better than social security – but not some huge amount that enables an affluent lifestyle. To have an affluent lifestyle in retirement, people should expect to save [...] Read More]]> The challenge of providing retirement security to all citizens is the broader issue behind the debate over what level of public sector pension benefits are both equitable and financially sustainable. California Senator Kevin De Leon’s proposed legislation, SB 1234, will hopefully further this debate.

As reported in the Sacramento Bee by Jon Ortiz on February 24th “California Democrats push pension plan for nongovernment workers,” and in the Los Angeles Times by Mark Lifsher on February 23rd, “Private-sector retirement savings plan proposed for California,” DeLeon’s bill will require every employer in the state with five or more employees to participate in the plan. If employers already offer a pension plan or 401K plan, they would be exempt.

Plenty of commentators have already weighed in with sobering missives on the many problems with DeLeon’s bill. You can read them in the San Bernardino Press Enterprise, the Pleasanton Weekly, CalWatchdog, CalWhine, and elsewhere. But when DeLeon says his bill “is designed to supplement Social Security retirement benefits,” he is on to something bigger than he may realize.

The goal of taxpayer funded retirement security, whether it is for a retired government worker or a retired private sector worker living on social security, is not to support an affluent lifestyle. A taxpayer funded retirement pension should be a modest amount, better than social security – but not some huge amount that enables an affluent lifestyle. To have an affluent lifestyle in retirement, people should expect to save money and eliminate debt, not just show up at a government job for 20 or 30 years then collect far more than a social security recipient could ever hope to collect. Why not eliminate public sector pensions, and provide everyone social security, supplemented by the plan DeLeon is proposing?

When estimating just how much DeLeon’s pension plan for private sector workers is going to actually be able to pay out, it will highlight a fundamental principle that still seems to be lost on the public sector apologists: Not all of us are libertarians, nor are all of us against improved retirement security for all citizens. But whatever it is that taxpayers are asked to support has to be equally accessible to ALL workers according to the same merit-based and need-based formulas. We can disagree on the formulas. We can disagree on what we believe is financially sustainable. But however our government may enable better retirement security – it should be the SAME DEAL for all taxpayers. The disgrace is that public sector unions have used their political muscle to offer deals to their members in the government workforce that could never, ever be financially feasible to all workers.

As DeLeon’s bill is debated, hopefully it will not only highlight the truly grotesque disparity between government worker pensions and social security for the rest of us, but it will shed light on the biggest single variable affecting the affordability of public sector pensions: The long-term annual rate of return for the pension fund.

As quoted in the Los Angeles Times, DeLeon said “The board would be required to invest only in conservative instruments, such as U.S. government Treasury bonds.”

Does Senator DeLeon understand what sort of can of worms he is opening here? A ten-year U.S. treasury bond pays around 3.0% per year. Yet CalPERS still claims they can earn 7.75% per year. How much money will this “supplemental pension,” expressed as a percent of final salary, deliver to someone who contributes 3% of their salary for 40 years, invested at 3% per year?

As the chart following this post proves, taking 3.0% from a paycheck – assuming normal inflation and minimal merit increases (which increases ultimate fund earnings by concentrating more investment in the early career years) – will buy a person who retires after 40 years of full time work at a final annual salary of $50,000 with a whopping $2,010 pension per year; that’s an extra $168 per month. Anyone who dismisses this decidedly math-centric, wonkish claim as “right-wing spin” is invited to verify these calculations for themselves.

What Senator DeLeon is going to learn, along with many other worthy liberals in the State Legislature who are grappling with the pension crisis, is the extreme sensitivity of pension fund solvency to the achievable rates of return for these funds. And if Senator DeLeon wants to impose a “risk free” rate of return on a pension fund for private workers, he may wish to impose the same restrictions on public sector pension funds. Or stop having taxpayers make up the difference when those more aggressive investments fail to meet expectations.

There is nothing wrong with our legislators trying to address the issue of retirement security. But while doing so, they might question why we are now on track to pay more money each year, in absolute dollars, to our retired public sector workers in the form of pensions, than we will pay in social security to the other 80% of our workforce when they retire. They might also question why they have gone into partnership with the very Wall Street wizards they rhetorically condemn, by allowing them to promise absurdly high rates of pension fund returns to public sector employee negotiators, then together turn on taxpayers to cover the inevitable shortfall (for more, read “Merge Social Security & Public Pensions“).

*  *  *

The table below, “Total Compensation – Gov’t vs. Self-Employed Worker,” begins to illustrate this disparity. The difference between total compensation and gross earnings in the case of the self-employed worker is zero. There is nobody paying for benefits beyond what the self-employed person earns. Whatever amenities they need to purchase, they have to pay for out of their gross earnings.

In the case of the government worker, there are a host of employer funded benefits; only the basic ones are covered here, using conservative assumptions. If it is assumed the average household health insurance coverage is $500 per month, and the employer [...] Read More]]> When discussing what level of compensation is appropriate and affordable for government workers, it is helpful to make apples-to-apples comparisons between public and private sector workers. In this analysis, the ultimate private sector taxpayer, the self-employed worker, is compared to the typical state or local government employee in California. In both cases, the annual compensation used for comparison is $70,000, which is the average base salary paid to state and local government employees in California (ref. U.S. Census data for California: State, and Local). But the impact of benefits paid by the government employer, combined with the impact of mandatory employee contributions (taxes, retirement set-asides, and healthcare costs), yield dramatically different end results in terms of total net compensation. Both the self-employed worker and the government worker make $70,000 per year. But to say they make the same amount of money is grossly misleading.

The table below, “Total Compensation – Gov’t vs. Self-Employed Worker,” begins to illustrate this disparity. The difference between total compensation and gross earnings in the case of the self-employed worker is zero. There is nobody paying for benefits beyond what the self-employed person earns. Whatever amenities they need to purchase, they have to pay for out of their gross earnings.

In the case of the government worker, there are a host of employer funded benefits; only the basic ones are covered here, using conservative assumptions. If it is assumed the average household health insurance coverage is $500 per month, and the employer pays 50% of that, this adds $3,000 per year to the total compensation of a government worker. In reality, factoring in employer coverages of medical, dental and vision plans, it is very unlikely the average government worker doesn’t get well in excess of $3,000 per year in employer health care benefits.

Current expenses for health care, however, are not the only health expenses that governments pay for their workers. Typically there are provisions for retirement health care coverage that are taken on as obligations by the government for their workers. For example, there are “medigap” plans, with all or part of the premiums paid for by the government. In some cases, such as with most safety employees and management employees, the government pays 100% of the premiums for lifetime premium health insurance plans. These future obligations must be funded during current employment. To estimate another $2,000 per year for this cost, or, more generally, to estimate $5,000 per year per employee for the average government contribution to current and retirement health care, is definitely conservative.

In addition to healthcare costs, state and local government employers cover pension benefits for which much of the costs – and in many cases 100% of the costs – are paid by the government, not the employee. If one assumes a contribution by the government employer of only 12% of gross salary per year – clearly lower than reality – this adds another $8,400 to the total compensation of a government worker.

A simmering question regarding pensions for government workers – how much can these pension funds really earn each year in interest – generates the next estimate. In our analysis “The Taxpayer Cost to Bailout California’s Pensions,” along with “What Percent of Payroll Will Keep Pensions Solvent,” we have explored the underlying calculations in depth. The reader is invited to review those calculations and assumptions. But the bottom line is this: If pension funds have to lower their long-term expected rate of return by 2.0%, and they will, this will add at least $11,200 per year to the cost of funding the average pension. These obligations may be scaled back, but until they are, this amount must be included when adding up the total compensation of the average government employee in California.

Taking all of this into account, a self-employed person making $70,000 per year makes $70,000 per year. A government worker making $70,000 per year in base pay is actually making $94,600 per year in total compensation, 35% more. But it doesn’t end there.

The next table, below, examines the impact of what might best be described as “mandatory employee contributions,” taking the form of the employee share of health insurance coverage, retirement pensions and social security, along with state and local taxes. Once these mandatory contributions are deducted from the income (before tax in the case of health care and retirement contributions) of both the self-employed and the government worker, and the employer provided benefits – which are tax-free – are added back to the income of the government worker, the disparity between their actual net total compensation becomes even more dramatic.

If one assumes that the self-employed person is going to purchase health insurance for their household, they will pay 100% of the premium. Using the same assumptions, this means they will spend $6,000 per year for these benefits, whereas the government worker, paying 50% of the premium, will only spend $3,000 per year.

By participating in social security and medicare as a self-employed person, they are obligated to pay both the employee and the employer share of those assessments, which at a gross annual income of $70,000 will cost them $10,500 per year. By contrast, even if the government worker pays 10% of their salary into their pension – a level that is still fairly unusual to see among government workers – this will only cost them $7,000 per year.

In the above table, “Net Total Compensation – Gov’t vs. Self-Employed Worker,” these before tax deductions are subtracted from their base annual salary to arrive at their taxable annual salary. This taxable amount then has deducted from it what a California household in 2011 would have to pay in state and federal taxes. Finally, the non-taxable employer contributions are added back to the actual take-home pay to yield the net total compensation after mandatory contributions.

This is the apples-to-apples result: A self-employed person making $70,000 per year, once they’ve paid their taxes. social security and insurance premiums, will enjoy compensation of $45,021 per year. A government worker making $70,000 per year, once they’ve paid their taxes, pension contribution and insurance premiums, with the value of their current and deferred benefits added back, will enjoy compensation of $74,781 per year, 66% more.

It doesn’t end there. As shown on the next table, “Retirement Security – Gov’t vs. Self-Employed Worker,” the self-employed worker, who must pay $10,500 per year for social security and medicare, can expect to retire at the age of 66 with a social security benefit of $20,144 per year. The government worker, who must pay $7,000 per year for their pension, can expect to retire at the age of 60 with a pension of $46,666 per year. The total value of these respective retirement benefits, based on a life-span of 80, is $282,016 for the self-employed worker, and $933,324 for the government worker.

It is important to emphasize how conservative these numbers are. While the average pay of a government worker in California is only about $70,000 per year, the average pension for state and local government workers in California is not $46K per year, but nearly $70K per year. For state and local government workers who retire at age 66 and spend their careers in government service, the average pension is nearly $100K per year (ref. CalPERS Annual Report FYE 6-30-11, page 153, and CalSTRS Annual Report FYE 6-30-11, page 149). This means the assumptions used to calculate pension contributions at various rates of return, which assumed pensions equivalent to 66% of average salary, are obviously inadequate. This is because pensions aren’t calculated on average salary, they’re calculated on final salary. The assumptions underlying our pension contribution estimates also don’t take into account the current state of underfunding for pensions.

For a self-employed person to enjoy a net total compensation equivalent to the average government employee who makes “only” $70,000 per year, they would have to earn well in excess of $100,000 per year, particularly since as they climb in gross income, they encounter higher and higher tax brackets. A self employed person who makes less than $108,000 per year and more than $74,000 per year, because their income is still under the social security withholding ceiling, actually pays taxes at the margin of over 50%. But that is a topic for another post.

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago when salaries [...] Read More]]> Last month both of California’s largest government employee pension funds, CalPERS and CalSTRS, released their portfolio earnings numbers for the most recent twelve months. In a statement released on January 24th, “CalSTRS Calendar Year-End Investment Returns Show Slight Gains,” CalSTRS disclosed “Investment returns for the California State Teachers’ Retirement System (CalSTRS) ended the 2011 calendar year posting a 2.3 percent gain.” CalPER’s statement released on January 23rd, was titled “[CalPERS} Pension Fund earns 1.1 percent return for 2011 calendar year.”

These funds, and the rest of California’s many local government employee pension funds, are still clinging to long-term rate of return assumptions of between 7.5% and 7.75% per year. So how much would taxpayers be on the hook for if rates of return stay this low?

The first step towards determining this would be to estimate the average pension paid out to a state or local worker in California, based on recent retirees who have worked a full 30 year career. Despite the claim that “The average CalPERS pension is $2,220 per month” (made yet again in the final paragraph of their above-referenced press release), for a more accurate figure, one must look at the average pension awarded recent retirees, based on a full 30+ year career. The problem with the low figure used by CalPERS and others is that it includes people who retired decades ago when salaries and pension benefit formulas were much lower, and it includes people who may have only worked a few years for the government. Since we will be multiplying this average pension by the number of full time state and local government workers in California, we have to assume a full career when calculating the average pension, since for every worker who only worked 10 years, for example, two additional retirees will also be in the system who have themselves also only worked 10 years. To calculate the cost of a full-career pension, you have to add all three of these part-career retirees together. Here is what these pensions really average, based on CalPERS Annual Report FYE 6-30-11 (page 153), and CalSTRS Annual Report FYE 6-30-11, (page 149):

CalPERS average final salary for 30 years work, retiring 2010: $82,884
CalPERS average pension for 30 years work, retiring 2010: $60,894  -
Pension equals 73% of final salary (average of 25-30 year and 30+ year stats)

CalSTRS average final salary for 30 years work, retiring 2010: $88,164
CalSTRS average pension for 30 years work, retiring 2010: $59,580  -
Pension equals 68% of final salary (average of 25-30 year and 30-35 year stats)

If one extrapolates the CalPERS and CalSTRS data to the many independent pension funds serving local agencies – many of these are quite large, such as the one for Los Angeles County employees – it is probably conservative to peg the average pension going forward for full-career government workers in California at at least $60,000 per year, and at least 70% of final salary.

The next step in figuring out how much state and local government worker pensions could cost California’s taxpayers in the future is to establish the sensitivity of pension contribution rates to changes in the rate of return of pension funds. CIV FI has explored this question repeatedly, with a good summary in the July 2011 post entitled “What Percent of Payroll Will Keep Pensions Solvent?” Using the same financial assumptions as were used in that analysis, here is how the required pension contribution rates – expressed as a percent of payroll – change in response to lower earning rates for the pension funds. This is based on pensions averaging 70% of final salary, and assumes 30 years working, 25 years retired, and salary (in real dollars) eventually doubling between hire date and retirement date:

If the pension fund’s return is 7.75%, the contribution rate is 22% of payroll.
If the pension fund’s return is 6.75%, the contribution rate is 28% of payroll.
If the pension fund’s return is 5.75%, the contribution rate is 37% of payroll.
If the pension fund’s return is 4.75%, the contribution rate is 48% of payroll.
If the pension fund’s return is 3.75%, the contribution rate is 63% of payroll.

What the above figures quickly indicate is not only that the required payroll contributions go up sharply when projected rates of investment return come down, but that the lower the rate of return goes, the more sharply the required contribution rises.

To complete this analysis, one only needs to multiply the number of full time state and local government employees in California by the average payroll for these employees, and multiply that result by the various required contribution rates. Using 2010 U.S. Census data for California’s State Employees and for California’s Local Government Employees, one can quickly determine that there are 339,430 state workers earning on average $68,880 in base annual salary, and there are 1,185,935 local government workers earning on average $69,399 in base annual salary.

To sum this up, there are currently 1,525,365 full time (not “full-time equivalent,” which would be an even higher number, but those part-time employees may or may not have pension benefits) state and local government employees in California. They earn, on average, $69,284 per year in base pay. Here is how much pensions will cost for these workers each year based on various rates of return:

If the pension fund’s return is 7.75%, the state pays $23 billion to pension funds each year.
If the pension fund’s return is 6.75%, the state pays $29 billion to pension funds each year.
If the pension fund’s return is 5.75%, the state pays $39 billion to pension funds each year.
If the pension fund’s return is 4.75%, the state pays $51 billion to pension funds each year.
If the pension fund’s return is 3.75%, the state pays $66 billion to pension funds each year.

It is interesting to note that both CalPERS and CalSTRS failed to even achieve a 3.75% return in calendar year 2011, the lowest amount used in these examples and the lowest amount that can even keep pace with inflation.

When one takes into account the fact that only about five million households in California pay net taxes, the impact of the pension con job Wall Street brokerages have enlisted the support of public sector unions to foist onto taxpayers is even more dramatic. Because if, during the great deleveraging that likely will consume this economy for at least another decade, California’s pension funds only deliver 3.75% per year, instead of 7.75% per year, that will translate into $8,600 per year in new taxes for each and every taxpaying California household.

(1) More money is needed to take care of retirees, and investment returns will no longer cover most of the costs. America’s aging population creates higher demand for liquidity, because retired people need to sell assets to generate cash to pay bills. As an ever higher percentage of America’s population are retirees, there will be more sellers in the investment market, dampening prices and price appreciation. This will lower rates of return on retirement investments and, in turn, all assets.

(2) Advancing technologies have automated millions of jobs. From office information systems to robotic manufacturing, innovation has eliminated the need for millions of highly educated, highly skilled workers. Despite rising productivity, workers have been relentlessly displaced. Entire [...] Read More]]> To say America’s middle class is threatened is a common refrain. But there is no malevolent force operating to shrink America’s middle class. America’s middle class is challenged by the momentum of history. Technology automates jobs at the same time as the capacity of foreign manufacturers continuously improves. At the same time, American taxpayers confront the challenges of providing for an aging population as well as choosing what is affordable from an expanding array of social welfare and safety-net choices. In some respects, America’s middle class is a victim of its own success – we live longer, we have better medical technology, our productivity is continuously improving, and American military power – expensively purchased – enables competitive global commerce. Here then, relieved of ideological cant, are the reasons for America’s shrinking middle class:

(1) More money is needed to take care of retirees, and investment returns will no longer cover most of the costs. America’s aging population creates higher demand for liquidity, because retired people need to sell assets to generate cash to pay bills. As an ever higher percentage of America’s population are retirees, there will be more sellers in the investment market, dampening prices and price appreciation. This will lower rates of return on retirement investments and, in turn, all assets.

(2) Advancing technologies have automated millions of jobs. From office information systems to robotic manufacturing, innovation has eliminated the need for millions of highly educated, highly skilled workers. Despite rising productivity, workers have been relentlessly displaced. Entire industries have experienced steady growth at the same time as they have reduced their workforces.

(3) International competition to export products has never been more challenging. Nations create jobs more easily if they are net exporters. During the half-century beginning around 1950, America went from being the only industrialized nation left standing in the wake of WWII to being reduced to 25% of global GDP. Still the world’s largest economy by far, the U.S. has not been a net exporter for nearly twenty years – instead the U.S. relies on foreign purchases of U.S. assets to offset chronic trade deficits.

(4) The ability of the U.S. economy to sustain a trade deficit via debt accumulation is not unlimited. The sheer size and diversity of the U.S. economy buys time, but Americans already carry an unusually high debt load. To the extent that interest payments are remitted to offshore creditors or offshore corporations, American borrowing to finance imports is sending cash and jobs overseas.

(5) Failure to regulate speculative lending, combined with the internationalization and automation of trading in stocks and other assets has enabled America’s debt bubble to reach unprecedented levels. The last time the total market debt in the U.S. exceeded 300% of GDP, America’s economy experienced the great depression. Total market debt in the U.S., not including derivatives, approaches 400% of GDP.

The way to preserve America’s middle class requires embracing disruptive innovation and competition.

In a age where the U.S. no longer owns virtually all the productive assets in the world, the ebb and flow of trade balances between nations requires them to take turns either relying on debt accumulation and asset inflation to finance their trade deficits, or being nations that eliminate debt and have positive cash flows through being net exporters. Because innovations deliver increasing productivity, this ebb and flow can yield aggregate net asset values of all nations combined continuously increasing. As long as these asset values increase, debt accumulation does not have to stop completely. If collective global asset formation has sufficient momentum, even nations who are net importers and are accumulating debt can still improve their debt to asset ratios, rendering them economically healthier.

The key to economic growth, however, is not just to increase productivity through supporting technological innovation, which is difficult enough by itself. Nations also must support policies that lower the costs for basic resources, energy, water, land, materials. This requires competitive resource development, something that is resisted by powerful special interests, corporate, labor, environmentalist and government, who all benefit from high prices and high profits for basic necessities. But if competitive resource development enabled these commodities to be consumed at lower prices, this would release capital for investment in, as well as consumption of, entirely new classes of assets that technological innovation is delivering at an accelerating rate. Increasing productivity through technology is creative destruction, and, crucially, results in asset deflation and lower profit margins in the monopolistic sectors being disrupted, but this is nonetheless desirable because it is the only way sufficient capital can flow instead into investments in entirely new classes of valuable, previously nonexistent assets. Only by creating new assets in new industries can technological innovation ensure a continuous increase in global economic wealth, and hence more collateral to improve debt / asset ratios. These new areas for investment and asset formation will issue from ongoing and dramatic technological innovations in the fields of health care and life-extension, entertainment and transportation, expansion of settlements and industry into outer space and the deep ocean, and myriad other compelling products and services we can’t yet imagine.

This is one of the unheralded tragedies of a malthusian “setting limits” mentality common to environmentalists and coopted by corporate and union cartels. Despite daunting challenges that span every continent and culture, human civilization is experiencing a golden age of technological advancement – steady improvements to the collective global per-capita standard of living – and that golden age may be denied fruition by misguided policies designed to curtail development of energy and other basic resources. By encouraging competition to provide these commodities at lower prices, capital becomes available to eliminate debt and invest in new industries. This allows for more rapid increases in per capita wealth and lower birth rates. Ultimately, tomorrow’s global energy consumption and resource depletion will be less if rapid energy development occurs today.

America’s middle class faces new rules, but these new rules are actually the historical norm for peoples in the world. The aftermath of WWII, which bestowed on the U.S. a pent-up ability for consumer product innovation, a uniquely intact industrial base, and an explosion of births that, for a while, kept pace with advances in life-span, was an aberration without precedent in human history. The good news is that the absolute median standard of living for Americans continues to improve. From the poorest person to the richest in America, as well as throughout the polarizing middle, the available amenities consistently exceed, year after year, what has come before.

America’s middle class is indeed threatened, insofar as the economic distance between those at the top and those at the bottom is widening, and the percentage of people in the middle is declining. But by embracing competition and innovation of all types, Americans, who remain at all strata better off than they have ever been, can climb out of their debt quagmire and usher in the next phase of the digital renaissance.

Who are these forgotten 33%? Who is this one-third of America, people who, compared to the other two-thirds, pay far more in taxes than they receive in return? Who are the faces of the forgotten 33%?

The chart below depicts the American electorate divided not into two groups – the 1% vs. the 99%, but four groups – the 1% super-rich, then 20% representing government workers, 46% representing citizens who either pay zero taxes or negative taxes (ala the “earned income credit”), and the remaining 33% who are neither super-rich, government employees, or not paying taxes. One might term this group the forgotten 33%, because no special interest will speak for them. They have neither the numbers nor the financial wherewithal to decisively influence elections.

The choice of colors – red for the 20% political class AND for the 46% entitlement class, is not accidental. These voters have an identity of interests that automatically inclines them to favor more government spending; government workers because more government spending means more job security, higher pay and benefits, and more expansion of their organizations, and citizens who pay no taxes because their economic status is enhanced through receiving entitlements for which they bear no share of the costs. This identity of interests between the political class and the entitled class has created a supermajority of voters in America who have a self-interest in supporting [...] Read More]]> Much has been made of the 1% vs. the 99%; the “super-rich” vs. the rest of us, who are presumably the hard working, loyal Americans who’ve been left behind. But who are the rest of us, and how does who we are affect how much we pay in taxes, and how we may vote?

The chart below depicts the American electorate divided not into two groups – the 1% vs. the 99%, but four groups – the 1% super-rich, then 20% representing government workers, 46% representing citizens who either pay zero taxes or negative taxes (ala the “earned income credit”), and the remaining 33% who are neither super-rich, government employees, or not paying taxes. One might term this group the forgotten 33%, because no special interest will speak for them. They have neither the numbers nor the financial wherewithal to decisively influence elections.

The choice of colors – red for the 20% political class AND for the 46% entitlement class, is not accidental. These voters have an identity of interests that automatically inclines them to favor more government spending; government workers because more government spending means more job security, higher pay and benefits, and more expansion of their organizations, and citizens who pay no taxes because their economic status is enhanced through receiving entitlements for which they bear no share of the costs. This identity of interests between the political class and the entitled class has created a supermajority of voters in America who have a self-interest in supporting big-government.

Perhaps the most appalling – and unchallenged – fallacy promoted by the big-government supermajority, primarily through their spokespersons in the public sector unions, is that the super-rich are “trying to destroy the middle-class by pitting the private sector workers against the public sector workers.” Nothing could be further from the truth.

The middle class can indeed be represented by the 20% of the population who works for the government, combined with the 33% of the population who works in the private sector and make enough money to pay income taxes. But the similarity ends there. Government workers have pay and benefits that are, on average, twice what private sector workers earn. Their pension funds offer defined retirement benefits that are literally five times better, on average, than what private sector workers collect from social security.

While the government worker union spokespersons want us to believe that Wall Street is trying to divide and conquer the middle class by pitting private sector workers against government workers, the truth is this: Government workers have joined with Wall Street and turned against the private sector taxpayers, because it is in their mutual economic interests to do so. Nothing illustrates this fact more clearly than the existence of nearly $4.0 trillion in government employee pension fund assets, paid for by taxpayers, invested and managed by Wall Street, with taxpayers guaranteeing the returns (if the investments fall short, taxes go up), and government workers guaranteed the defined benefit that allows them to retire, on average, 10-15 years earlier than private sector workers, with pensions that average 3-4 times as much money as social security.

The “super-rich” embody, of course, more financial interests than just those of Wall Street bankers. But Wall Street bankers, who used their bipartisan political influence to over-build America’s financial sector and defer any sort of meaningful regulations that might have introduced competition and accountability into their industry, are the ones who most deserve the ire of the American electorate. They are also the ones who are most co-dependent with the political class, because there is no source of money pouring into Wall Street that comes anywhere close to the hundreds of billions each year that taxpayers have to fork over to the public employee pension funds.

To turn around and suggest that somehow the super-rich are aligned with the forgotten 33% – those middle-class private sector workers who make enough to pay taxes – strains credulity. Both the super-rich as individuals and the super-rich to the extent they are associated with corporations or financial institutions are completely bi-partisan in their political contributions. For that matter, Republicans are only scarcely less addicted to big government programs and higher taxes than Democrats. Many of the super-rich are not capitalists in the most virtuous and productive sense of the word – they aren’t trying to altruistically imagine innovations that will make our lives better, then fighting to convince people to voluntarily purchase these products – they are using their political influence to lock out competitors, access government subsidies, and force people to purchase their products through laws and regulations.

Here are reasons why the super-majority of the political class and the entitlement class is unsustainable:

(1) The much higher compensation and benefits for government workers relative to private sector workers, and the nearly unassailable political influence they now wield through their unions, are both factors that have slowly emerged over the past 10-20 years, but never before existed.

(2) Only now are the demographic implications of an aging population (along with recently enhanced retirement benefits for government workers) making a real impact on government budgets.

(3) Medical treatment options are now so effective and expensive that medical spending must legitimately occupy a greater percentage of GDP than historically, and funding this cannot occur if 66% of the population pay no taxes.

(4) The size and extent of government and government regulations are greater than ever, putting additional pressure on the economy.

America’s forgotten 33%, those who are neither entitled to avoid all taxes, nor members of the political class who pay no taxes, nor the super-rich, might be called “The Atlas Generation.” They carry the world on their shoulders. Their challenge is daunting – they must convince the political class to support sustainable taxpayer funded benefits under formulas that apply equally to ALL workers, public or private, without relying on Wall Street speculative investments to pay for this. Equally challenging, they must convince the entitled class that there is an alternative to identity politics, the politics of envy, and the cycle of government dependency. And they must convince a critical mass of the politically influential super-rich to embrace and advocate a political economy that nurtures competition instead of crony capitalism.

(1) Public employees used to take jobs that paid less than private sector jobs. Up until about 20 years ago, the trade-off was clear: Government workers exchanged a lower salary for better benefits, a pension that was better than social security, and job security. This was a fair exchange, and the system worked just fine.

(2) Over the past 20 years, during the economically unsustainable internet bubble followed by the real-estate bubble, public sector unions stirred up envy among public sector employees, prodding them into demanding unsustainable increases to their compensation to match the private sector. Since these bubbles have burst, these unions use their nearly absolute power over California’s state and local politicians to maintain unsustainable levels of public sector employee compensation.

(3) We now have a situation where public employees have, in most cases, better base salaries than in [...] Read More]]> Not as a libertarians, but as a good government fiscal conservatives, who value government and government programs, how might we respond to charges of right wing radicalism? How might we respond to charges that we are biased against working people, or want to destroy the middle class, or are a tool of the super-rich? If you want to keep good government programs, but want to make government more financially efficient, how to respond to charges of resenting government workers, or wanting to change the deal on government workers, or not appreciating government workers? Focusing on the state and local government entities here in sunny California, here are some thoughts:

(1) Public employees used to take jobs that paid less than private sector jobs. Up until about 20 years ago, the trade-off was clear: Government workers exchanged a lower salary for better benefits, a pension that was better than social security, and job security. This was a fair exchange, and the system worked just fine.

(2) Over the past 20 years, during the economically unsustainable internet bubble followed by the real-estate bubble, public sector unions stirred up envy among public sector employees, prodding them into demanding unsustainable increases to their compensation to match the private sector. Since these bubbles have burst, these unions use their nearly absolute power over California’s state and local politicians to maintain unsustainable levels of public sector employee compensation.

(3) We now have a situation where public employees have, in most cases, better base salaries than in the private sector, and enhanced pension benefits that now are about five times as generous as social security.

(4) It is absurd for anyone to compare public sector workers to the wealthy. Of course wealthy people will have more wealth than middle class workers. Public sector workers need to compare themselves to private sector workers. In California, the private sector worker makes, on average, about half as much in total compensation than the public sector worker. It strains credulity – and is downright arrogant – to suggest this entire differential can be attributed to superior education and skills.

(5) The people who are being denied a chance to experience upward mobility are the private sector small businesspeople who create jobs, and the people who they hire. Entrepreneurs personally carry legal liability and financial risk for their businesses. They work all the time. When the economy strains under the financial enslavement caused by the partnership of Wall Street banks with government debtors, private sector businesses can’t thrive, and their employees make less.

(6) The wealthy are not right-wing or left-wing. There is as much money donated to left wing causes by wealthy individuals as to right wing causes. The distortion in our democracy is not caused by wealthy individuals, who are ideologically diverse and whose contributions benefit both sides of political and economic questions.

(7) It is necessary to make a distinction between wealthy entrepreneurs who create products and services people voluntarily consume and which improve people’s lives, and wealthy bankers and financial middlemen who have used their political influence to overbuild their industry and become a drain on the economic health of America.

(8) The biggest source of funds to Wall Street bankers and financial middlemen, by far, is the deficit spending of governments. When a government issues bonds, the money goes through Wall Street. When a government pension fund expropriates taxpayer’s money, the beneficiaries are Wall Street brokerages.

(9) The agenda of public sector unions is perfectly aligned with the goals of Wall Street banks. Create bigger government payrolls and pay government employees more. Borrow money and raise taxes to accomplish this. Issue interest bearing bonds to cover deficits and transfer tax revenue into pension fund accounts.

While arguing for more efficient government, it is important to explain how government spending impacts the middle class private sector worker who now has to pay half of their income in taxes (sales, property, income, and “hidden taxes” buried in every utility and telecom bill) so that middle class government employees can earn twice what they make, while Wall Street bankers get obscenely rich managing the government debt and government employee pension funds. And while having no bias against the wealthy, it is necessary to make a distinction between wealthy people who have earned their wealth through entrepreneurship, and those who are wealthy because they are part of the Wall Street cabal that enables and profits from the unionized government bias to tax, spend, and borrow.