The economy is picking up steam. State, city and county employees have willingly accepted millions upon millions of dollars in cuts to their pensions. California’s largest pension fund has recouped every single investment penny it lost from the Great Recession. So I thought perhaps California police officers, teachers, firefighters, and other public employees could finally exhale. I hoped we could finally enjoy relief from daily attacks for the modest pensions we count on for retirement security.
Buddy Magor, Peace Officers Research Association of California
Public CEO, January 27, 2014, “Stop Blaming Public Employee Pensions for Problems”
Whether or not the economy is “picking up steam” at a rate sufficient to rescue California’s financially challenged public sector pension funds is a debate that is by no means over. But let’s consider Mr. Magor’s other point regarding the “modest pensions we count on for retirement security.”
By now everyone should be familiar with the so-called “three-at-fifty” pension formula which, starting in 1999 with the passage of SB 400, was steadily adopted throughout California’s cities and counties for public safety employees. Simply stated, “three-at-fifty” means that public safety employee pensions are calculated as follows: Their final salary is multiplied by 3.0%, with the result multiplied by the number of years they worked. For example, if a public safety employee’s final salary is $100,000, and they worked for 30 years, then their pension would be $100,000 times 3.0% times 30 (years), equaling $90,000 per year. The “fifty” in the pension formula refers to the minimum age of eligibility.
In some cases, recent reforms have moved the age of eligibility to age 55, meaning the formula is unaltered, but the retiree isn’t eligible for their pension until they’re 55 years old instead of 50 years old. Other reforms have increased the amount public safety employees need to personally contribute to their pension benefits via payroll withholding, although in virtually all cases these increased contributions only apply to the “normal” payment and not to the monstrous unfunded liabilities. But let’s not get into the weeds, because the real question is this:
COMPARISON TO SOCIAL SECURITY
How does this “modest” (and reformed) pension formula, “three-at-fifty-five,” compare to Social Security? Perhaps an “apples to apples” comparison will establish which of these benefits is modest (and sustainable), and which is not.
In the spreadsheet analysis which anyone who wishes to verify these calculations can download here, an attempt is made to express the Social Security benefit in the same terms as a public sector pension formula. Instead of 55, the age of eligibility is 68. Instead of 30 years as the typical term of service – representing age 25 through age 54 for a public safety employee – the multiplier is 43, representing age 25 through age 67 for a Social Security recipient. By entering a birth date of 12-31-1945 in the Social Security Administrations “Quick Calculator,” along with a final salary of $80,000 per year, it is simple enough to verify that a 68 year old retiree would be eligible for a 2014 Social Security benefit of $26,532.
Here is the comparison between this Social Security benefit and a pension for a 55 year old public safety employee who retires after working for 30 years, who also had a final salary of $80,000 in 2013:
Public Safety: “3.0% @ 55,” Multiply $80,000 x 3.0% x 30 = pension benefit of $72,000 at age 55.
Social Security: “0.77% @ 68,” Multiply $80,000 x 0.77% x 43 = Social Security benefit of $26,532 at age 68.
This is the true apples to apples comparison that renders any suggestion that public safety retirement benefits are “modest,” even at the reformed “3.0% at 55” formula, to put it charitably, highly questionable. Are these pensions, fantastically better than Social Security, meant to make up for a career of modest earnings? That’s also debatable.
A recent California Public Policy Center study entitled “How Much Do California’s State, City and County Workers Really Make?” estimated the average pay and benefit for full time state/local government employees in California. The study used data provided by the State controller’s office and includes downloadable spreadsheets for anyone who wants to verify the findings. The average 2012 base pay – pension eligible pay – for full-time public safety employees in California was estimated (ref. Table 3 in the study) at $76,251 for state agencies, $76,864 for counties, and $91,782 for cities. And these numbers are not skewed by the presence of executive positions – repeated analysis has demonstrated that median figures are consistently higher than averages for public sector compensation, especially for public safety employees.
In reality, the final year salaries that public safety pensions are calculated on are much higher than these mid-career averages. Most public safety employees retiring today after a 30 year career in California can expect pensions of about $100,000 per year. Since Social Security benefits are progressive, and pensions are linear, an apples to apples comparison using larger examples would yield even greater disparities. But we’re getting into the weeds again.
RETURN ON INVESTMENT FOR SOCIAL SECURITY CONTRIBUTIONS
Here’s one more statistic that should be of interest. Public sector pension funds earn 7.5% per year. That’s pretty much guaranteed, because if they don’t, the taxpayer covers the difference, not the beneficiary.
What about an independent contractor in the private sector who turns over 12.4% of their gross earnings to the Social Security Administration, year after year, and retires after earning $80,000 in their last year of work? What’s their return on investment? It is a whopping 1.5%. For all practical purposes, middle and upper income Social Security participants earn nothing on their Social Security contributions.
It isn’t necessary to eliminate defined benefits for public employees, nor is it inappropriate for public safety employees to earn better retirement benefits than private taxpayers. But to earn three times as much, thirteen years sooner, is not affordable or fair. It is certainly not “modest.”
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Ed Ring is the executive director of the California Public Policy Center