Why Frequently Cited Average Pension Numbers Are Misleadingly Low

Public pension systems in California, most notably CalPERS and CalSTRS, are quick to cite their average pension amount as evidence that their pension benefits are reasonable. In addition to the pension plans themselves, many defenders of public pension plans will cite these averages themselves when attempting to counter claims that pension benefits have become excessive in recent years.

There are three very important factors that need to be accounted for when computing a raw average and using this value as an indication for what a public employee can expect to receive in retirement benefits.

Reason #1 – Failing to Adjust for Years of Service Worked

The biggest and most widely documented factor is overlooking years of service. Most analyses of average benefits include the implicit assumption that the pension benefit cited is for a full career (30 years or more) of service.

Including the pension amounts of those who have not worked a full career produces an average value that is much lower than what those who have worked a full career are receiving. Since a full-career employee is the benchmark used in measuring the equity of pension benefits, it is only appropriate to use the data that reflects that.

Reason #2 – Failing to Account for Beneficiaries

Many pension plans maintain their records in a way that makes the most sense for processing payments, but are incredibly misleading when used to calculate average pension amounts. The case of beneficiaries is a prime example of this. When a public employee qualifies for a pension, there are set guidelines for each plan depending on how beneficiaries are treated, but most plans default to the surviving spouse. In many cases, the retiree can designate additional beneficiaries as well.

So when calculating average pension amounts, if beneficiaries aren’t accurately identified and segregated from active service retirement amounts, the resulting average will be skewed downward. This is because any beneficiary payment will always be a portion of the full retirement amount, which will be incorrectly treated as if it were its own separate benefit amount. An example found on Transparentcalifornia.com illustrates this effect.

In the San Jose Police and Fire Pension Plan, there is no distinction between beneficiary and active service retirees. Consider, however, the following case of multiple beneficiaries. An individual with a retirement year of 2007 and years of service value of 25.02 received a $76,120 pension amount in 2013. Two more entries share the last name of this individual, as well as identical years of service and year of retirement but both only received $7,100 in 2012. As it is inconceivable that a San Jose police or fire retiree could retire with 25 years of service and receive an annual pension of just $7,100, these three separate entries – $76,120, $7,100, and $7,100 – are all components of one pension. So in this case, even when screening to isolate averages for pensioners with 25+ years of service, a $90,320 pension for one individual would impact the averages as three separate pensions of $30,107.

Reason #3 – The Same Pension Amount Reported in Fragmented Parts

Another potential error is when one employee’s pension is reported in fragmented parts, to account for either a divorced spouse receiving a portion of their pension, or even in cases where the retiree changed departments and received a pension amount under two or more different formulas. As indicated above, for every instance this occurs the pension amount will be reported at least 50% lower than its true value in raw average calculations.

Conclusion

It is entirely reasonable for pension plans to keep their payment records in a format that is most efficient and accurate for them. The observations made above are in no way suggesting that any of the data made available by the various plans is compiled in an intentionally misleading way. However, it is the responsibility of anyone who uses pension averages in their arguments, either for or against pension reform, to accurately interpret this data. Public relations professionals who represent pension systems and public sector unions often ignore reasons why pension benefits are far more generous than the statistics they come up with would indicate.

As demonstrated above, when it comes to frequently cited average pension amounts, there is much more to the story than it would appear at first glance. 

Robert Fellner is a researcher at the Nevada Policy Research Institute (NPRI) and joined the Institute in December 2013. Robert is currently working on the largest privately funded state and local government payroll and pensions records project in California history, TransparentCalifornia, a joint venture of the California Public Policy Center and NPRI. Robert has lived in Las Vegas since 2005 when he moved to Nevada to become a professional poker player. Robert has had a remarkably successfully poker career including two top 10 World Series of Poker finishes. Additionally, his economic analysis on the minimum wage law won first place in a 2011 essay contest hosted by the George Mason University.