Social Security is Healthy Compared to Public Sector Pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today about 20% of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is over $60,000 per year, and their average retirement age is 58. Because they retire ten years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30% of the retired population. The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security – which many of them do) there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year. Got that? The total pension payouts to government retirees, who were only 20% of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80% as much.

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20%, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks – one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees – who represent 20% of the active workforce – than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two powerful special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401K funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401K accounts, regardless of their volatility.

The reality is that defined benefits are always preferable to 401K accounts because they greatly reduce market risk and they virtually eliminate mortality risk – i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt saturated, deficit ridden, aging society, and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using taxpayer’s money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

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Ed Ring is the editor of UnionWatch, and can be reached at

12 replies
  1. Avatar
    Tough Love says:

    Ed, A few comments.
    (1) I believe the Social Security full retirement age is 67, not 68,
    (2) I don’t see your point of the worker-to-retiree ratio for SS recipients being 3 to 1, while for gov’t workers to retirees it is lower (at 2 to 1, and dropping). For SS workers, THEY (and their employers pay the bill), but Gov’t workers only pay a very small percentage of THEIR retirement … with over 75% being paid by ALL Taxpayers ….. so the lower ratio for gov’t workers is not the real problem, it’s the grossly excessive level of benefits promised to them.
    (3) and to your list of Six suggestions, a CRITICAL one is that if changes to Public Sector Plans are to have any real financial impact (BEFORE we go broke), material pension reductions must include the FUTURE Service of CURRENT (not just new) gov’t workers.

  2. Avatar
    Robert T says:

    Defined Contribution pensions that keep clawing at the taxpayer must stop. Let the unions fund them themselves. How in the world is the taxpayer supposed to fund everything that can and will go wrong between now and 2056? Police and fire are the worst offenders. We get a “millage ask” once a year to keep feeding these pension monsters.

  3. Avatar
    Tough Love says:

    You mean Defined BENEFIT Plans, not Defined CONTRIBUTION Plans.

    The former are open-ended Taxpayer-guaranteed promises to provide a defined monthly “benefit” whatever it ends up costing, while the later is simply an agree-upon periodic “contribution” expressed as a % of pay (with ZERO possibility of more money needed from Taxpayers later on).

  4. Avatar
    4counter says:

    One thing rarely ever mentioned in these comparisons is that putting only social security up against pensions is an unbalanced comparison. For many in the private sector, 401ks are a major retirement supplement to social security, especially if the employer provides a match. With this combination in mind, private sector employees who are adequately planning for their retirement should contribute regularly and heavily to their 401ks, especially if an employer match is provided.

    So the public sector pension number (when recipients are not eligible for SS) should realistically be compared to the SS + 401k average for private sector recipients as well, not just the SS amount.

  5. Avatar
    alan says:

    Govt workers have 403B’s which are essentially identical and matched as well… There is no need to add this needless item to the private sector comp as it not unique.

  6. Avatar
    www says:

    It seems to me that if a local gov pension were operated like social security it would look like this: 1. state/city contributes $ to pension. 2. Pension sends all that $ back to the state/city by buying their bonds. 3. state/city spends the $ on current projects.

    It is misleading to say that soc sec is better funded than pensions, because soc sec isn’t really funded at all. Yes, there is a soc sec “trust fund” but it consists entirely of claims on future taxpayers.

    In contrast, public pension trust funds consist of real savings.

  7. Avatar
    Tough Love says:


    Sounds like you are trying to downplay the extraordinary generosity of PUBLIC Sector pension Plans.

    Put aside Social Security for the Public/Private Sector pension comparison because nationally, 2/3-3/4 of all PUBLIC Sector workers ARE in fact covered by SS.

    With that put aside, what PRIVATE Sector workers typically get towards their retirement from their employers is a 3-5% of pay 401K “match”… that’s it, period.

    And no matter how you might try to spin the facts, to PROPERLY fully fund the TYPICAL Public Sector worker’s pension over their working career, requires a Total level annual contribution of 25-40% of pay for non-safety workers and 40-60% of pay for safety workers.

    Even AFTER deducting the 5-10% of pay the workers may contribute, leaves 20-30% of pay Taxpayer contributions for non-safety workers and 35-50% of pay Taxpayer contributions for non-safety workers ….rough;y TEN TIMES what Private Sector workers get from their employers.

    With Public Sector workers earning no less in “CASH pay” (per the US Gov’t BLS), there is ZERO justification for ANY greater pensions let along ones so absurdly generous that they cost the Taxpayer 10 times as much as THEY get.

  8. Avatar
    Editor says:

    Tough Love – the reason the worker-to-retiree ratio is relevant is to show how the public sector, because of their early retirements, is at an inherent disadvantage with respect to self-funding their retirements. The irony is deep. We don’t even consider the logical solution: If you retire earlier than Social Security participants, you should get a pension that is LESS than Social Security.

    As for your comment that material pension reductions must apply to ALL public employees, that is clear in recommendation #5 “Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75% of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.”

  9. Avatar
    Editor says:

    www – Social Security benefits to current retirees are funded by contributions by active workers. And that model, with a 3-to-1 worker to retiree ratio that appears likely to hold for the next 30 years or more, is sustainable with only minor adjustments.

    You are correct that public pension trust funds are “real savings,” but the reliance on high rates of return from those funds, combined with the retroactive and very generous benefit enhancements public employees have gotten in the past 15 years, are the reasons these funds are turning insolvent. It will take just one more market downturn to literally crash most major public employee pension funds in the U.S.

    If public employee pension funds were 100% invested in the United States, or better yet, in municipal infrastructure bonds within the jurisdictions where the participating members work, the returns would be lower on the funds, but there would be tremendous benefits to the U.S. economy. And of course, returns would be lower but less volatile, and benefit reductions would be required.

    Instead, public employee unions continue to fight to maintain excessive pension benefits, preferring to support casino bankers to roll the dice for higher returns than can possibly be sustained in the long-term. This is a recipe for disaster and hence, Social Security is a far more stable system.

  10. Avatar
    Don Levit says:

    According to Stephen Goss, chief actuary of Social Security and Medicare, the trust fund is empty – it includes only collateral that the trust fund is owed from the Treasury. The good news, according to Goss, is that Social Security does not really need a trust fund as much as it needs current contributions. The reason: unlike private pensions, which can be ended without the AVAILABILITY OF new entrants, Social Security and Medicare are permanent fixtures, with new entrants guaranteed forever.
    These new entrants lessen the importance of the trust fund, or a fully paid-up program, such as those that are supposed to be funded this way in the private sector. It is the difference between a closed system (private pensions) and an open system (Social Security and Medicare).
    Don Levit

  11. Avatar
    www says:

    The social security trust fund “contains” about 2.5 trillion dollars of IOUs. This is not trivial. This represents years of savings of workers who thought this was being invested for them. In fact it was effectively spent on government programs of the past. Some of that might be construed as ‘investment’ but certainly most of it has already been consumed. That’s why a large number of baby boomers has to depend on a small number of younger workers to cough up higher payroll (and other) taxes in the future to pay their social security checks.

  12. Avatar
    Tough Love says:

    ???? … What Public Sector worker wants to self-fund their own (or another Public worker’s retirement) ? They want WAY MORE than their fair share and they want taxpayers (80+% of whom are NOT Public Sector workers) to pay for almost all of it.

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