Social Security Benefits vs. Public Pensions

When discussing the issue of public employee pensions, it is easy to suggest that these pensions are necessary because public employees usually don’t earn a social security benefit. While this is true, it ignores the startling disparity between the value of a social security benefit and the value of the typical public employee pension. And it isn’t hard to make the comparison.

If you go to the Social Security online “Estimated Social Security Retirement Benefit” table, you will see what you may expect to receive from social security when you retire, based on how much you earned in your last year working. A person making $65K per year, retiring on their 66th birthday, will begin to collect a monthly social security benefit of $1,609, or $19,308 per year.

In California, public employee pensions typically are calculated based on how many years the employee works, times a set percentage that usually ranges between 2.0% and 3.0%. As an example of how this would work, here are some apples to apples comparisons with social security, i.e., a public employee who enters the workforce at age 22, works for 44 years, makes $65K per year, and retires on their 66th birthday. At a 2.0% per year pension factor – which is the low end of the scale for public employees – this person will qualify for a pension equivalent to 88% of their final salary, based on 2.0% per year times 44 years worked. This equates [...] Read More

Maintaining Pension Solvency

One of the biggest challenges facing governments is determining how to adequately fund present and future pension benefits for their employees. While public employees are working, if a sufficient amount of money is set aside for them each year and invested competently, then by the time the employee retires, their fund balance should be adequate to draw down each month to pay their pension, yet not be fully depleted until after they’ve died. As will be seen, however, unless some very optimistic scenarios are used as the basis for projecting future pension solvency, the amounts that are currently being contributed to public employee pension funds are grossly inadequate.

While the calculation of how much money needs to be set aside each month to build up an adequate pension fund is not simple, it is not so complex or arcane as to defy analysis by policymakers, journalists and commentators, voters, employee advocates, or anyone else concerned with this issue.

In the analysis to follow, four cases are presented, each one calculating what percentage of payroll must be allocated to annual pension funding under various assumptions. These cases concern the pension of a single individual, but when assessing the sustainability of public employee pension benefits, these calculations apply in aggregate as well.

In the four examples below, the same assumptions are made for each individual pension fund chronology – the individual enters public employment at age 25, works until they are 55, and dies at age 85. All calculations and assumptions deal [...] Read More