Merge Social Security and Public Pensions

When solutions to the challenge to provide retirement security to American citizens in the 21st century are considered, they typically address either social security or public sector pensions, but rarely focus on both of these systems together. But when considered together, as systems that each have unique strengths and weaknesses that might be combined in a single program available to all Americans, options present themselves that might otherwise be ignored.

With both social security and public sector pensions, the challenge of maintaining financial sustainability is dramatically affected by the demographic reality of an aging population. As increasing numbers of people live well into their eighties and nineties, the ratio of workers to retirees edges closer and closer to 1.0.

There are four ways to address the reality of an aging population: (1) Increase withholding from current workers, (2) Increase the retirement age, (3) Lower the level of retirement benefits, and (4) Increase the amount the retirement trust fund can earn. Before delving into each of these further, however, it is important to identify one crucial advantage the USA enjoys vs. virtually all other major developed nations. America, alone among major nations, is projected to have a perfectly even distribution of ages within her population.

AMERICA’S DEMOGRAPHIC ADVANTAGE

America, like all developed nations, has an aging population. But as the four charts below indicate, unlike all other major developed nations, America’s population is replacing itself at an even rate. It is difficult to overstate the serendipity of this phenomena, nor the […] Read More

Sustainable Retirement Finance

When assessing the financial sustainability of any government administered plan to provide retirement security to their citizens, it is important to consider two factors, (1) the nation’s overall population demographics, and (2) the economic model of the plan. In-turn, when evaluating the economic model of the plan, it is important to consider the plan’s sustainability apart from reliance on returns from passive investments. It is important to assess how well a government-funded retirement benefit plan can be supported via a pay-as-you go system, where each year, tax assessments on current workers are used to pay retirement benefits for retired workers.

In the United States, there are two government operated financial systems that administer our collectively funded, i.e., taxpayer funded programs to pay retirees a certain amount each year that they may live comfortably. One may assume a great range of thresholds to define “comfortably” but in any event these two systems are very distinct, in ways that are fairly easily explained. They are social security, for which about 80% of the U.S. workforce participates, and public employee pensions, for which about 20% of the U.S. workforce participates.

Social security is based on the assumption that participants work, on average, from the age 25 to 65, then are retired from age 66 to 85, i.e., there are two participants in the work force for every one recipient who is retired. Social security, on average, also may assume that payments to retirees average one-third what earnings are by workers. On this basis, […] Read More

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 to […] Read More