On June 9th Reuters ran a story entitled “California’s Brown set for fight over pension reform” that has some interesting quotes from his Democratic counterparts in the state legislature. According to the article, Warren Furutani, an assembly member representing Long Beach. who co-heads a joint committee that will craft pension legislation, had this to say:
“There was a lot left to do [regarding pension reform], such as taking care of workers not covered by federal Social Security because of their state government jobs.” (Italics added)
This is a common refrain voiced by pension reactionaries: State and local government workers are unable to enjoy social security, and therefore we must safeguard their pensions. But has Mr. Furutani taken a recent look at the average state or local pension benefit vs. the average social security benefit?
According to the social security administration, on their FAQ page “Average monthly Social Security benefit for a retired worker,” “The average monthly Social Security benefit for a retired worker was about $1,230 at the beginning of 2012.”
On a yearly basis, this means the average social security recipient today can expect to collect $14,760 per year.
What about public sector pensions?
Here is a statistic that is easy to cook. Because most state or local government pensioners have not worked 30+ years for the government. This pulls the average pension down, as does the fact that most government pensioners are still people who retired 10+ years ago, well before rates of pay (used as the base for calculating pensions) as well as pension formulas themselves, were elevated far beyond levels that are either sustainable or equitable. But what taxpayers have to fund today are pensions based on a workforce that will retire in the future, according to formulas currently in effect. And in cases where pensions are only awarded for 10 or 15 years service, there are two or three people who will all get these partial pensions. The cost to taxpayers to fund one pension based on 30 years work is exactly the same as funding two pensions based on 15 years work. So here is the apples-to-apples typical state or local pension in California, according to the annual reports of the pension funds themselves:
If you go to the pages referenced below you will see that the AVERAGE pension for people who retired after 30 years work, and who retired in the past few years after benefits were enhanced, is nearly $70,000 per year.
CalPERS Annual Financial Report FYE 6-30-2011, page 153
CalSTRS Annual Financial Report FYE 6-30-2010, page 149
Apparently Assemblyman Furutani believes that we need to be careful that we don’t create undue hardship by excessively paring the pension benefits for state workers, because they don’t get social security, which pays on average $15,000 per year starting at age 68, vs. government pensions, which pay on average nearly $70,000 per year starting around age 55.
It is tempting to indulge in a bit of sarcasm here. Shall we choose? Work for the government and, on average, you can retire 10+ years earlier and receive nearly five times as much per year in retirement via your pension. But you’ll lose your social security benefit. Darn!
To be constructive, there is a lot we can learn from social security. Unlike public sector pensions, they are progressive, which means the more you make, the lower the percentage of your average earnings will come back to you in the form of a social security benefit. Applying progressive rules to the pension formulas would go a long way towards fixing them financially. For example, if the average pension benefit were reduced to merely twice the average social security benefit, or to $30,000 per year, the financial problem would disappear overnight.
Another virtue of social security is the fact that it is based on average earnings over an entire career, not the final year of pay. This eliminates the potential for spiking. Another virtue of social security is the fact that the funds are not gambled in the international markets by global bankers (i.e., pension fund managers) but are held in trust. If pension funds were required to be invested in low risk instruments such as U.S. Treasury Bills, as they once were, the great con job regarding astronomical rates of return justifying absurdly elevated benefit formulas would have never happened.
Ultimately, what Assemblyman Furutani and his ilk need to learn from social security is that it is financially sustainable, whereas government pensions are not. This is because social security only pays about one-third of average career earnings to beneficiaries, starting at age 68, while government pensions pay approximately two-thirds of average career earnings to beneficiaries, starting at age 55. And because government pensions start paying recipients earlier in life, the worker to retiree ratio in the public sector is close to 1-to-1, whereas the social security system’s worker to retiree ratio will never be lower than about 2-to-1. With no return on investment, these metrics imply social security is sustainable via 16% withholding, whereas pensions require 66% withholding to achieve sustainability. Which system do you think will crash first?
Because it provides a modest, appropriate minimum safety net of taxpayer funded retirement security to all American workers, social security is not insolvent, nor is it a Ponzi scheme, nor is it the enabler of hyper-aggressive global casino capitalist investment scams, backed up and bailed out by taxpayers. Public sector pensions are all of these things.
Assemblyman Furutani and his entire gang of pension reactionaries would be doing California and the nation a huge favor by insisting that every state worker indeed receive social security, which they have heretofore been deprived of. They can have social security and nothing else, just like every other taxpayer. Perhaps then an honest national dialog regarding the structure and solvency of social security – a far more easily managed challenge – can take place, because public and private sector employees would be united as stakeholders in the same benefit.