CSEA Understates Average State Pension

Today’s Sacramento Bee featured a viewpoint column entitled “Pension ‘Reformers’ distort facts on benefits.” The column was written by Martha Penry, “a special education teacher’s assistant in the Twin Rivers school district.” Not disclosed in the article was the fact that Ms. Penry is also a high ranking public employee union official, as evidenced by her membership on the CSEA Board of Directors.

In her column Ms. Penry accuses “pension busters” of overstating the cost of pensions and the amount of the average pension. She claims that “three quarters of CalPERS retirees collect yearly pensions of $36,000 or less.” What Ms. Penry does not do, however, is acknowledge that the average she is referring to includes retirees who didn’t work full time, or who didn’t work much more than five years (the minimum vesting period for a pension), or who retired decades ago when pay rates and pension formulas were still fairly reasonable.

A more honest assessment of the average pension has to examine rates for people who are retiring now, under today’s pay scales and pension formulas, who have worked their full careers in government service. Here is the most recent information, drawn directly from the annual reports of Cal STRS and CalPERS:

From the CalSTRS Annual Report, page 135:
CalSTRS participants who retired during the 12 months ending June 30th, 2010 (the most recent data), earned pensions as follows:
25-30 years service, average pension $50,772 per year.
30-35 years service, average pension $67,980 per year.
35-40 years service, average pension $86,736 per year.

From the CalPERS Annual Report, page 151:
CalPERS participants who retired during the 12 months ending December 31st, 2009 (the most recent data), earned pensions as follows:
25-30 years service, average pension $53,182 per year.
30+ years service, average pension $66,828 per year.

When one considers that the highest Social Security benefit possible, for people earning over $125,000 per year, is only $31,000, starting at age 68, it boggles the mind that anyone can suggest that reducing pension formulas for California’s state workers will risk “forcing retirees into poverty.” When government workers spend an entire career in government service, they earn pensions that are literally triple (or more) what they might have expected to receive from social security.

A related point Ms. Penry makes regards not the scale of the pensions, but the amount paid into pensions. She writes “public employee pensions amount to just 3% of California’s budget.” This is also grossly misleading. To dive into the numbers and better understand why that number is far, far too low, refer to “How Rates of Return Affect Required Pension Contributions,” “Why Real Rates of Return Will Fall,” and  “What Percent of California’s State AND Local Budgets are Employee Compensation?

An equally relevant (and faster) way to sanity check Ms. Penry’s “3%” figure, however, is to consider not what California’s taxpayers are paying today into Wall Street pension funds for their government workers, but what taxpayers will pay in the future if reforms aren’t made. There are 1.85 million state and local government employees in California. As they retire they are replacing people who retired when pay scales and pension formulas were far more sustainable. Using an average career of 30 years and an average retirement of 20 years, we are on track to have 1.25 million retired state and local workers collecting, on average, $60,000 per year in retirement pension payments. That equals $75 billion per year. Shall the taxpayers, who will collect an average social security benefit of $15,000 per year, really be called upon to make up a difference of that magnitude when Wall Street returns fail? Because that process has already begun.

Ms. Penry got one thing right in her column today – reducing pension benefits being paid to former, current and future government workers is not going to solve California’s budget woes all by itself. The base rates of pay for most government workers will also have to be reduced. It is ironic that the unions representing government workers seized the opportunity when the economy was enjoying the phony real estate boom (and the internet bubble before that) to negotiate dramatic increases to their compensation packages, yet are blind to the need to reduce those packages now that the bubbles are burst.

Anyone who believes that calls to lower pension benefits for government workers is just “pension busting,” is invited to review the data presented here and in related posts. By pretending that today’s “average” pension includes part-time workers, workers who only logged a few years in government service, and people who retired long before pension benefits were inflated beyond sustainability, it is Ms. Penry who is distorting the facts.

7 replies
  1. Avatar
    Tough Love says:

    Nice summary of the issue .. and the TRUTH. Here’s another way to see the absurdity of this excess, and just WHO pays for it:

    So let’s cut to the chase …….

    Private sector employers typically contribute 3%-8% of an employee’s cash pay towards retirement, yet the total cost (expressed as a level annual % of cash pay throughout one’s career) of Public Sector Defined Benefit pensions (for a 30-year employee retiring at age 55) ranges from 29% to 58% depending on the richness of the benefit formula (with safety workers generally at the highest end).

    More specifically, for the noted formulas, the level annual %s of cash pay are as follows:
    2% per year of service w/o COLA – 29%
    2% per year of service with COLA – 39%
    3% per year of service w/o COLA – 44%
    3% per year of service with COLA – 58%

    Even after deducting the typical employee contribution of about 5% of pay, that still leaves the employer (meaning TAXPAYERS) contributing 24% to 53% of pay. The middle of these %s is 38.5% vs 5.5% (the middle of the range of what Private Sector employers contribute) or SEVEN (yes SEVEN) times greater.

    This is completely absurd, and the very modest “tweaking” at the edges by practically begging employees for a few more percent of pay contributions will NOT even begin solve the HUGE financial problem.

    TOTAL COMPENSATION (Cash Pay plus Pensions plus Benefits) should be comparable in the Public and Private Sectors for similar jobs, and with Cash Pay in the Public Sector now AT LEAST equal to (if not greater) than that in the Private Sector, there is ZERO justification for greater Public Sector Pensions and Benefits .

    Not for PAST service, but for FUTURE service, Public Sector pension accruals must immediately be brought FULLY down to the level of their Private Sector counterparts. Due to the huge reduction needed, the ONLY way to do this is to freeze the current defined benefit plans for CURRENT (yes CURRENT) workers, and switch everyone into a 401K-style Defined Contribution Plan with an employer contribution in the same 3%-8% range granted Private Sector workers.

    Additionally, since Private Sector retirees rarely get any retiree healthcare subsidy before eligibility for Medicare at age 65, similar restrictions should apply to Public Sector retirees.

    It’s TAXPAYERS’ money and Civil Servants are NOT more worthy of bigger pensions and better benefits.

  2. Avatar
    Rex The Wonder Dog! says:

    TL, you are using Calpers ROI of 7.75%, you need to double your figures, at least

  3. Avatar
    Tough Love says:

    Actually Rex, that’s not true, My figures assume that the earnings rate on all contributions (from the employee and the employer) is the same as the rate of annual salary increase in each of the 30 years. The specific percentages I show (in my table in my above comment) used 6%, but there is almost no difference if 5% or 7% is used.

    Interestingly, the %s required to fully fund the pension over the 30 year career WILL increase (decrease) by about 5 percentage points for each full percentage point that the earnings rate on contributions is less (more) than the assumed rate of salary increase.

    For example, the 39% in my table in my earlier comment would be about 34% (44%) if the earnings rate on contributions is 7% (5%) with the rate of annual salary increase held to 6%.

  4. Avatar
    Richard Rider says:

    And let’s not forget that — compared to private sector employees — most government workers:
    Work fewer days
    Work fewer hours per day
    Have lower performance standards
    Receive full regular pay for jury duty
    Retire years earlier
    Sometimes have some retiree health insurance coverage
    Have almost guaranteed job security after only a few years employment.

  5. Avatar
    Rex The Wonder Dog! says:

    Interestingly, the %s required to fully fund the pension over the 30 year career WILL increase (decrease) by about 5 percentage points for each full percentage point that the earnings rate on contributions is less (more) than the assumed rate of salary increase.

    Wrong. For every 1/4% point off on ROI, it will require a 25% increase on the front end contributions. A full point would require a 100% increase on the front end.

    Why do you think these pension funds refuse to even move a 1/4% point down on the discounted rate-like Calpers did last month??? Because the ROI changes dramatically on the back end.

  6. Avatar
    S Moderation Douglas says:

    And their feet stink.
    And they hate Jesus.

    Other than that, they’re ok.
    But I wouldn’t my daughter to marry one.

Leave a Reply

Want to join the discussion?
Feel free to contribute!

Leave a Reply

Your email address will not be published.