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, on-sixth of a worker’s wages, or about 16%, are required to be additionally assessed in order to fund payments to retirees on a pay-as-you-go basis. Social security clearly can remain sustainable, as long as it maintains the current two-to-one ratio of workers to retirees, and also pays on average one-third in retirement benefits compared to what current workers earn.
This relatively sanguine outlook for the future of social security is supported by that other key factor, demographics, particularly in the United States. For people born between the years of 1956 through the present, there about 20 million citizens for every five year age-group, from zero to 5, through 50 to 55. This means these projections will not be undermined by an aging population. The United States has a serendipitously even stream of people insofar as every age group is equally represented numerically, from today’s babies through baby-boomers born in the 1950s (ref. Funding Social Security vs. Public Pensions). America’s social security system as it is currently formulated is financially sustainable, and unless it dramatically changes its benefit formulas, will be for at least the next 50 years based on existing age demographics; probably much longer. The formula of 16% withholding for one-third average earnings in Social Security payments is eminently sustainable, without reliance on investment earnings.
When one considers the average years retired vs. worked, and the average annual pension as a percent of average annual per worker earnings, and compares public sector pension benefit formulas with social security benefit formulas, a completely different picture emerges. Public sector pension benefits, when evaluated on a pay-as-you-go basis – wherein current workers support retirees via current assessments – require far more withholding from total compensation. Here’s why:
The average public sector workers enjoys a one-to-one ratio of working years to retired years, unlike the social security system, which only provides a benefit based on a two-to-one ratio of working years to retired years. Public sector workers on average work from age 25 to 55, then are retired from age 55 to 85 years, one-to-one. Private sector social security recipients work from age 25 to 65, then are retired from 65 to 85, a two-to-one ratio. But the disparity doesn’t end there.
The average public sector worker – averaged based not on formulas for safety vs. non-safety workers, but at a blended rate incorporating the collective reality of all government workers – enjoys a retirement pension that is not, on average, one-third of what the average worker earns, but is instead two-thirds of what the average worker earns, twice as much. So if public sector worker retirement systems were funded via pay-as-you-go assessments, with each worker being responsible for supporting one retiree, they would have to have the system allocate an amount equivalent to 66% of their salary, an additional two-thirds on top of what they make, to be paid out to a public sector pensioner.
The financial sustainability of public sector pensions depends on 66% of each worker’s earnings being simultaneously paid out to a public sector retiree, the financial sustainability of social security depends on 16% of each worker’s earnings being simultaneously paid out to a social security recipient, less than one-fourth as much. No wonder public sector pension funds have become a collection agency for Wall Street, as their aggregated 401K plans tumble and toss upon the speculative waves of global finance, and are chary to simply ask for twice as much or more to be collected, from the taxpayers, now and forever to sustain public employee retirement pension payouts. As it is, about $250 billion per year of new money pours into Wall Street via public sector pension fund collections from state and local government payrolls (ref. The Axis of Wall Street & Unions).
It is ironic at best how spokespersons for public sector employee unions (also known as “associations.”) and even spokespersons for public sector employee pension funds are fond of accusing taxpayer groups and others concerned about unsustainable public sector pensions of “throwing us to the same fate as those private sector workers and their underwater 401K retirement funds.” Don’t they realize these taxpayer-funded public sector pension funds are themselves still merely gigantic 401K plans? Don’t they see the irony of holding private sector taxpayers accountable not only for our own losses at the hands of those Wall Street sharks, but also holding private sector taxpayers accountable for public employee pension fund losses at the hands of those same Wall Street sharks? Are government workers and their associations, however well-intentioned, complicit in or at least condoning this sustainability disparity because they like to retire collecting twice as much money for ten extra years?