CalPERS officials are fond of saying that their average pension benefit is only about $31,500 – suggesting that CalPERS members’ benefits are at Social Security-type levels.
On this basis, they argue it’s a “myth” that public pension benefits are excessive.
But is that really true? What happens when something like Social Security’s benefit assumptions – a full career of employment and minimum income levels – are used in the comparison?
When accounting for these factors, CalPERS is unable to hide behind the misleading cover of a raw average – CalPERS benefits are up to 5 times greater than the comparable Social Security payout.
We filtered the 2013 CalPERS pension data for retirees with at least 30 or more years of service credit to create parity in the comparisons between the Social Security benefit estimates, which assume 35 years of employment and a retirement age of 64 and 4 months. Social Security estimates were generated with the Social Security Administration’s Quick Calculator Benefit Estimates tool in October, 2014. CalPERS 2013 data is provided by TransparentCalifornia.com. By contrast, the average age of retirement for CalPERS members is only 60.
Next, we analyzed CalPERS retirees by their pensionable compensation. The top pensionable compensation bracket is greater or equal to $117,000 – the maximum taxable earnings limit for Social Security. The remaining brackets move down in 25% increments from there.
While the CalPERS values above represent the actual average pension received for the 2013 year, the Social Security benefit is an estimated figure. The SSA’s Benefit Estimator Tool requires a final salary, similar to pensionable compensation, in order to generate its estimates. We used the average pensionable compensation of the respective CalPERS retirees being compared to as the final salary for estimating the comparable Social Security benefit.
For example, the actual average pensionable compensation of all full career CalPERS retirees with a pensionable compensation of greater or equal to $117,000 was $146,250. Therefore, we used $146,250 as the final salary for generating the comparable Social Security benefit – $26,292.
These values, along with the average years of service of the respective CalPERS retirees, are displayed in the table below.
As shown above, CalPERS retirees with a reported pensionable compensation of at least $117,000 or more received an average 2013 pension benefit of $126,833. Additionally, the average years of service credit for these retirees was 33.85 and their average pensionable compensation was $146,250. By comparison, an employee who worked at least 35 years under Social Security and had a final salary of $146,250 can expect to receive a pension benefit of $26,292 in 2014.
Said differently, the CalPERS retiree with a pensionable compensation of at least $117,000 received a pension benefit nearly 5 times greater than a comparable private sector employee can expect to receive from Social Security. Those in the $87,750-$117,000 bracket received a benefit nearly 4 times greater than the comparable Social Security amount, while those with a final salary of less than $87,750 were receiving benefits over 3 times the comparable Social Security benefit.
It should be noted that the comparison of Social Security to CalPERS is not an apple to apple comparison. Most private employees participate in a defined contribution plan that will supplement their Social Security benefits. On the other hand, public employees who do not participate in Social Security are also not responsible for paying Social Security taxes. Further, CalPERS provides extremely generous health benefits for all of its members, regardless of income level, which are not captured in the values quoted above. Currently, these health benefits can cost up to $18,000 a year.
Nonetheless this comparison is a useful starting point to provide context for the value of CalPERS benefits, as opposed to obscuring them by quoting raw averages only.
Another striking inequity is the age of retirement a private sector worker needs to reach to receive full benefits, compared with a CalPERS retiree.
There is enormous value in the ability to retire at an earlier age rather than at a later one. For CalPERS retirees, they may retire as early as 55 and receive full benefits that are significantly greater than private sector retirees who, on average, have to work more years and retire later at life. For CalPERS safety officers (police/fire) they may retire as early as 50 and receive their maximum benefits.
This structure further compounds the disparity between CalPERS benefits and comparable Social Security benefits. Not only are CalPERS retirees receiving benefits that dwarf what Social Security can offer; they are able to retire up to a full decade earlier than private sector workers as well.
Given the cap on Social Security benefits, the trend demonstrated above is not surprising. As the maximum Social Security benefit one could receive in 2014 is capped at $31,704, compared to the lack of any cap whatsoever for CalPERS benefits, those public employees who receive larger salaries are going to receive exponentially greater pension benefits than what Social Security offers.
The aim of Social Security is to be a progressive tax that takes from those earning more and, consequently, least in need of assistance, and gives to those who earn less and are more in need of assistance in retirement. CalPERS, however, is essentially a wealth maximizing system. It provides lavish pension benefits for its members, with the highest earners receiving the largest share.
Perversely, these benefits are primarily funded by taxpayers who receive dramatically reduced retirement benefits from Social Security and, subsequently, are faced with a burden the CalPERS full-career retiree is immune from – the need to defer present spending in an attempt to supplement their meager Social Security benefits once in retirement.
As troubling as the inequity of CalPERS is, the more pressing issue is that it’s simply not sustainable in the long run. There are good reasons why defined benefit pension systems are heading towards extinction in the private sector.
The public sector, however, has held onto the defined benefit plan system. Given the substantial benefits CalPERS provides to their members, public employees and their unions have strong incentives to lobby on its behalf.
While a private firm would jettison any system that produces the long term liability associated with California’s defined benefit plans, politicians have little to no incentive to act on behalf of the taxpayers. The benefits received are immediate and relatively concentrated, while the costs are widely dispersed. Further, while some of the cost is beginning to be felt today, the lion’s share can be delayed for future generations, a demographic that has been traditionally ignored by today’s politician.
It is imperative that Californians recognize the true value, and cost, of a CalPERS pension, and recognize the urgent need for reform measures such as those that have been discussed exhaustively elsewhere.
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