STUMP » Articles » Public Pensions Point-Counterpoint: How Expensive Are They, Really? » 17 September 2015, 06:06

We’ve got a point-counterpoint today, along with a proposal.

POINT: THOSE PENSIONS AREN’T THAT BIG NUH-UH

In the first corner is Mike Hiltzik. In prior posts, Hiltzik bitched about a ballot proposal to cut pensions, and educating the masses about how closing down pensions make them magically a whole lot more expensive.

Here he is again, telling us that pensions aren’t that big:

We can start with Biggs’ assertion about “pension millionaires,” which is based on calculations such as that “in Nevada, an average full-career state worker can expect to receive $1.3 million in lifetime pension benefits. Alaska, California, Colorado and Oregon all pay lifetime benefits exceeding $1.2 million.”

We’ll do Biggs the courtesy of not presuming that he intends these scary figures to mislead, although it’s hard to think of any other reason to use them. According to government statistics, the average 60-year-old can expect to live almost another 23 years; the average 65-year-old almost 20 more years. In other words, Nevada’s figures translate into average annual benefits of $56,500 to $65,000, California’s to averages of $52,000 to $60,000. It’s unclear if Biggs is using the present values of a two-decade income stream or just adding annual benefits together, but obviously an annual retirement income of $52,000 doesn’t sound as shocking as “lifetime” income of $1.2 million. If it did, here’s betting that Biggs would have used it. In any case, an annual income of even $65,000 won’t make anyone a “millionaire” in the conventional sense of the term.

Moreover, Biggs acknowledges that these are the benefits for “full-career” state workers — that is, those who worked at least 30 years, and possibly more than 40, at their public jobs. “For employees who spend a career in state government,” he wrote, “generous pensions put retired public workers among the highest earners in their state.” But how representative are they of the public workforce?

The answer is, not very.

According to CalPERS, the California state retirement system, the average length of service for a state retiree is just under 20 years. The average annual benefit comes to between $32,800 and $36,000. CalPERS says its average member retires at age 60, so with an average life expectancy of 83, even the highest-earning average retiree will collect, over his or her retirement, $828,000—not quite a millionaire.

Dude, do you know what most retirees, period, make per year?

This is from a few years ago, but I doubt it’s budged:

In 2013, 44.7 million Americans were age 65 and older. Half of all older adults had less than $20,380 in yearly income from all sources.

In 2013, half of all older households received less than $35,611 in yearly income from all sources.

That’s from all sources. That includes income from salary or wages, by the way, asmore and more older adults are working for money.

So let’s look at their page for pension income:

In 2013, one out of three older adults received income from private company or union pension plans, federal, state, or local government pension plans, or Railroad Retirement, military or veterans pensions. The median private pension benefit of individuals age 65 and older was $8,612 a year. The median state or local government pension benefit was $20,276 a year.

These are medians, not averages.

I think most people would say that $36K for 20 years of work is a pretty damn sweet deal.

I agree the “pension millionaire” thing is a bit oversold, but let’s go check with the person who made the calculations that Hiltzik is bitching about.

COUNTERPOINT: WE GOTTA COMPARE APPLES-TO-APPLES

Here is Andrew Biggs, fighting back:

In my study, I showed that in eight states the average full-career state government employee would receive over $1 million in pension benefits over the course of their retirement. In 23 states, lifetime benefits topped $750,000. On top of that, most public employees receive Social Security. In the average state, a full-career employee receives a total retirement income equal to 87% of his final earnings, well above the 70% figure that the Social Security Administration states is generally adequate. In five states, and average full-career state government employee would receive more in retirement than when he was working.

…..
First, Hiltzik claims that it’s misleading for me to analyze benefits paid to full-career public employees, because most public employees don’t work a full career in government. But most private sector employees do work a full career and they know how much they can expect to receive in retirement. By comparing their own retirement incomes to what a full-career government employee in their state receives, they can gauge the generosity of public pension benefits. Another way to handle the question is to compare annual benefit accruals in public pension plans to the amount that private employers contribute to their employees’ 401(k) accounts each year. This approach tells the same story: that public employee pensions are much, much more generous than private plans.

…..
Third, Hiltzik complains that I calculated the present value of public employee’s lifetime retirement benefits, which results in many public retirees being “pension millionaires.” Hiltzik writes, “We’ll do Biggs the courtesy of not presuming that he intends these scary figures to mislead, although it’s hard to think of any other reason to use them.” Hey, thanks! And pretty soon I’ll stop beating my wife! In reality, what these present value figures represent is the amount a private sector worker would need to have saved in his 401(k) in order to generate the same lifetime retirements benefits as a full-career state government employee. Given that most of us today have 401(k)s and we have a rough idea of what our balances are, it’s not unmeaningful to point out, say, that you’d need a balance of about $1.2 million at retirement age to have the same retirement income as the average full-career California state government employee. If there’s a more intuitive way to express it, I don’t know.

I don’t have time to check Biggs’s calculations right now, in a real way. Hiltzik didn’t calculate with a present value — unless you mean discounting at 0% (i.e. just adding up the cash flows) is present value. I have heard some people that one of the public pension valuations should use 0% discounting to show an extreme.

But even though I can’t do a direct calculation right now, I thought I’d see what annuity you could buy for $1 million right now — fixed annuity, no COLAs, etc.

I used Immediate Annuities.com as my source. To make for the highest possible income, I chose male single life (men have shorter life expectancies).

Age 55 male: $58K/year
Age 60 male: $60K/year
Age 65 male: $68K/year

I rounded these amounts, of course.

I have told many people that $1 million is not a lot of money for retirement — depending on your standard of living. If you check this calculator for income percentiles, you’ll see that $60K/year is in the a little higher than median income for all households.

It’s a lot higher percentile for retired people.

IRRELEVANT ANYWAY

I understand the sniping is related to the upcoming ballot measure on pensions in California, but I do get a bit tired of talking about average pension, what the public employees “deserve”, etc. I especially get tired of the $100K club, as if that were what was tipping over public pensions into insolvency. Guys, it’s not the investment fees, it’s not just a couple people making out like bandits — a bunch of “little” pensions can kill far more than a few “big” ones can.

Here is the relevant info:

That’s the info for Calpers from the Public Plans Database. (I can’t seem to get there right now. Are they down?)

Increasing percentage of payroll needed to be contributed as the funded ratio slowly decreases. That’s a problem.

California is getting squeezed — it’s not where Illinois is, yet. But it can get there.

This is a long-term problem, and if you don’t want a catastrophic failure — just look to Greece or Puerto Rico — you need to start making changes years before the catastrophic crisis point. One can “deserve” quite a lot and get nothing because the money is gone.

Pretending that it can never fail is not going to protect anybody.