How Much Do CalPERS Retirees Really Make?

INTRODUCTION

The pay and benefits of public employees is a discussion of increasing relevance to taxpayers. As noted in a CPPC study published earlier this month “How Much Do California’s State, City and County Workers Really Make?,” in California, personnel costs are estimated to consume 40% of total city budgets, 41% of the state budget for direct operations, and 52% of county budgets. In many cities and counties the percentage is much higher. And these averages don’t include personnel costs for outside contractors, nor do they include payments on debt that is directly related to personnel costs, such as pension obligation bonds.

Meanwhile, even when budgets are balanced, as may be the case this fiscal year at least for the State government, there is an overhang of debt obligations facing California’s state and local governments that are only manageable as long as interest rates remain relatively low. Another CPPC study published in 2013 entitled “Calculating California’s Total State and Local Government Debt,” estimated California’s total state and local bond debt at $382.9 billion as of June 30, 2012. That same study reported California’s officially recognized state and local unfunded obligations for retirement health insurance and pension obligations at $265.1 billion. Using more conservative assumptions regarding pension fund performance, the study estimated these retirement obligations on the part of California’s state and local governments could increase by an additional $389.8 billion. In all, it is quite likely that California’s taxpayers currently owe over $1.0 trillion in total debt and unfunded retirement obligations incurred by state and local government, and most of that is for retirement benefits for state and local government employees.

In this environment it is important to present factual information relating to public sector compensation. With respect to retirement benefits, it is helpful to present complete and accurate aggregate data, in order for policymakers and taxpayers to determine whether or not current benefit formulas are fair and financially sustainable. This study analyzes data from CalPERS, using nearly a half-million records obtained from CalPERS for 2012. In particular, this study presents data showing, by year of retirement, what the average pension benefits were in 2012. The study then normalizes these benefits to account for full careers using two benchmarks – the public sector “full career” expectation of 30 years, and the private sector “full career” expectation of 43 years.

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METHODS AND ASSUMPTIONS TO ACQUIRE DATA

The analysis and charts developed for this study can be evaluated by downloading the following spreadsheet. Please note the file size is 23 MB.

CalPERS-2012_Analysis_normalized-pensions-by-year-of-retirement.xlxs

The source data was acquired from the website www.TransparentCalifornia.com, an online resource produced through a joint-venture involving the California Policy Center and the Nevada Policy Research Institute. Since the focus in this study involves aggregate data, the names of individual participants have been removed from the spreadsheet.

Because the information provided by CalPERS included “year of retirement” and “years of service,” it is possible to normalize the information to produce “full career” equivalent pensions. It is vital to make this analysis, because no statistic representing average pensions can be evaluated apart from knowing how long most participants actually worked. It would be analogous to saying that an active worker only was paid $100 for a day’s work, without knowing how many hours they worked. Did they work ten hours and earn $10 per hour, or did they only work one hour and earn $100 per hour? Without looking at how many years participants worked to earn their pensions, we cannot even begin to have a productive discussion as to whether or these pensions are fair and appropriate or not.

From a standpoint of financial sustainability it is also vital to know how many years of service the average pensioner logged. Using the payroll analogy again, if a person only worked one hour in a day and made $100, and the employer needed someone at that post for ten hours, than the employer cost was actually $1,000 per day, whereas if that person worked a ten hour day and made $100, then the employer cost was only $100. This is precisely what is at stake when evaluating the overall cost to taxpayers of public sector pensions. For example, if the average years of service for a pensioner is only 20 years, and a private sector career is actually 40 years, then the taxpayer is essentially paying for two pensions for each position that would have been filled by one person working 40 years.

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AVERAGE LENGTH OF SERVICE AND AVERAGE PENSION – TOTAL POOL OF PARTICIPANTS

In Table 1 it can be seen that nearly a half-million retirees collected pension benefits through CalPERS during 2012, and that the average pension was $30,456 during that year. This average is consistent with the averages frequently cited by spokespersons for CalPERS and public sector unions representing CalPERS participants. But the average CalPERS retiree worked for 19.93 years. It is not reasonable to suggest that someone who has only worked half the duration of a normal career should expect a retirement benefit that might be more appropriate for a full career. And it is impossible to discuss, much less determine, whether or not CalPERS retirement benefits are appropriate, without taking into account how long a retiree has worked in order to earn their retirement benefit.

Table 1  –  Basic CalPERS Data, 2012

The next table, below, depicts how much these overall average pension amounts would increase if the retiree pool had turned in an average “years of service” of 30 years, which is a typical duration to use when considering public sector careers, as well as 43 years, which is typical for any private sector worker who hopes to receive the full Social Security benefit.

These calculations are made by dividing the average annual pension for a CalPERS participant in 2012, $30,456, by the average years of service, 19.93. The result, $1,528, is the amount the average CalPERS retiree accrued in annual pension benefits for each year they worked during their careers. This amount is multiplied by 30 to show what a current CalPERS retiree could expect, on average, if they had worked 30 years; $45,841.  This amount is multiplied by 43 to show what a current CalPERS retiree could expect, on average, if they had worked 43 years; $65,705.

Table 2  –  CalPERS Average Pensions Assuming Full Careers

Just as when considering current compensation for public employees, total compensation – direct pay plus employer paid benefits – is the only truly accurate measurement of how much they make, when considering retirement pensions for retired public employees, pensions adjusted to show what they would have been if the recipient had spent their entire career working and paying into the pension system, i.e., “full career equivalent pensions,” are the only accurate measurements of how much they are really getting in retirement. But there is another crucial variable that must be considered to complete this analysis, which is how much full career equivalent pensions are paying to CalPERS retirees who retired in recent years.

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AVERAGE PENSION ADJUSTED FOR FULL-CAREER – SHOWN BY YEAR OF RETIREMENT

Because the data provided by CalPERS includes not only years of service for each participant, but also the year they retired, it is possible to calculate average “full-career” pension benefits based on the year they retired. It is important to do this because pension benefits for California’s state and local government workers were steadily enhanced over the past decades, especially after 1999 when SB 400 was passed by the California state legislature. In general, pension formulas have been altered to bestow pension benefits that are approximately 50% better today than they were 20 years ago. At the same time, pension benefits are calculated on rates of pay, which themselves have increased at a rate exceeding inflation for at least the last 20 years.

Table 3 depicts the unambiguous impact of these trends. The last column to the right on the table, “Avg Pension, 43 Years Svc” shows what retirees would be really getting in pension benefits if they had worked 43 years – from age 25 through age 67 (one may substitute age 22 through age 64, or whatever, of course). As seen, the 21,590 retirees in 2012, had they worked 43 years, would have collected average annual pensions of $73,040.

In general, pensions adjusted to reflect a full career in the private sector exceeded $70,000 per year starting with those CalPERS participants retiring in 2002. They exceeded $60,000 but were less than $70,000 for CalPERS participants retiring in 2003, 2001, and 2000. Participants who retired between the years 1990 and 1999 collect pensions today – again, had they worked a full private sector career – greater than $50,000 and less than $60,000. Participants who retired between 1984 and 1989 collect pensions today greater than $40,000 and less than $50,000. And participants who retired prior to 1984 collect pensions today that are less than $40,000.

It is hard to find a data set that shows a greater correlation than this one: The earlier you retired, the less you’re going to get in your pension today. That is because pension formulas were enhanced over the past 10-20 years. Not only were they enhanced, but they were enhanced retroactively, meaning that someone nearing retirement who had been accruing pension benefits at a rate of 2.0% per year, for example, suddenly began accruing pension benefits at a rate of 3.0% per year not only for the years remaining in their career, but for every year they worked.

To speculate as to why it was possible to retroactively enhance pension formulas through legislative action, yet it is purportedly unconstitutional and therefore impossible to merely reduce these formulas for active workers from now on, would go beyond the scope of this modest analysis.

Table 3  –  CalPERS Average “Full Career” Pensions By Year of Retirement

It is probably necessary to reiterate as to why full-career equivalent pensions are the only accurate measurement to use when discussing whether or not today’s public sector pension benefits are appropriate or financially sustainable. The reason is simple and bears repeating:  Defenders of pensions as they are use “averages” that don’t seem terribly alarming. Notwithstanding the fact that a self-employed person in the private sector would have to earn over $100,000 per year and contribute 12.4% of their lifetime earnings in order to collect the maximum Social Security benefit of $31,704 at age 68, which barely exceeds the average CalPERS pension of $30,546, that average CalPERS pension is based on an average years of service of 19 years. Somebody who has only worked for 19 years should not have an expectation of a pension that exceeds the maximum Social Security benefit that requires 12.4% of a six-figure annual income and 43 years of work. Few, if any participants in CalPERS are contributing more than 12.4% of their pay into their pension account. The taxpayers make up the difference.

When debating the financial sustainability of CalPERS and the other pension funds serving California’s state and local government workers, there are many issues. How the unfunded liability is estimated is the topic of intense debate, focusing primarily on what rate-of-return these funds believe they will average over the next few decades. That rate-of-return estimate also is a primary determinant of how the “normal contribution” is calculated. There are myriad aspects to the debate over how to adequately fund public sector pensions. But missing from that debate far too frequently is an honest assessment of just how much, on average, these pensions are really worth to the recipients.

This study has presented a calculation of what CalPERS’s average pension benefit is based on years worked as well as year of retirement. It has normalized that data to show that a retiree who worked 30 years and retired last year, on average, can expect a pension of over $50,000 per year, and if they worked 43 years and retired last year, on average, can expect a pension of over $70,000 per year. Those millions of private sector taxpayers in California who have already worked well over 30 years, with no end in sight, should think carefully about these facts about pensions, when considering what sort of reforms to preserve solvency might be equitable for all workers, public and private.

About the Author:

Ed Ring is the executive director for the California Policy Center where he oversees execution of the Center’s strategic plan. He is also the editor of ProsperityCalifornia.org and UnionWatch.org. Previously as a consultant and full-time employee primarily for start-up companies in the Silicon Valley, Ring has done financial accounting for over 20 years, and brings this expertise to his analysis and commentary on issues of public sector finance. Ring has an MBA in Finance from the University of Southern California, and a BA in Political Science from UC Davis.