Can Pensions Be Altered?

Today's OC Watchdog (OC Register) provides some framework for discussion and a little food for thought.

The article concludes with this:

Current pension reform efforts only tackle newly hired workers — and do nothing about what’s owed to current workers. If governments could reduce pension benefits of current workers going forward — not for the past time they’ve already worked, but for the future still to come — they might wrestle those multi-billion-dollar unfunded liabilities down to a more manageable size.

Deferred Compensation, the Preferred Compensation

In its simplest form, deferred compensation is a benefit paid after services are rendered. 

It’s an interesting concept; paying someone today for services performed and then paying them again at some later date for those same services already rendered.

With that in mind, let’s look at what we might pay one of our public safety employees who retires at age 50 with 30 years of service and the “3%@50” defined benefit.  We’ll call her “Sara”.

For the sake of discussion, Sara will die of old age on her 85^th birthday which means she will receive her pension for 35 years. 

If Sara was paid $124,730 for her last year’s employment, she will receive $112,500 for those 35 retired years. 

Her pension check alone will cost taxpayers $3,937,500 after she has stopped rendering services to the City assuming she does not get cost of living adjustments which our current public safety retirees enjoy.  We have also excluded the lifetime medical benefit as well.

When she dies at 85 she will have received $6,695,940 for her 30 years of service (not including medical or pension COLA).

That would be the same as if taxpayers had paid her $223,198 for each of her 30 years of service.  Of course she started at $65,000 per year and never received a stepped increase in pay, only cost of living adjustments valued at 6% her first year and 2% for most years after and still was able to earn $124,730.  Not bad for no promotions.

The entire notion of deferred compensation has me convinced we are handling pensions completely wrong.

I see two possible ways to deal with this.  We could pay higher salaries now and let the employees figure out the best investment plan for their future (think 401-K) or workers will need to be productive for 40-50 years instead of 30 years.

State Controller Releases Salary and Pension Data

SACRAMENTO – State Controller John Chiang today updated his website showing the salary, pension benefits and other compensation for 256,222 State of California employees as well as 123,406 California State University (CSU) employees.
Last October, the Controller collected and posted wage information for more than 600,000 city and county employees. He also added 2,379 special districts’ payroll earlier this year.

The Government Compensation in California website covers elected officials as well as public employees. It includes the following information for each position:


• Minimum and maximum salary ranges;
• Actual wages paid;
• The applicable retirement formula;
• Any contributions by the employer to the employee’s share of pension costs;
• Any contributions by the employer to the employee’s deferred compensation plan; and
• Any employer payments for the employee’s health, vision and dental premium benefits.


In addition, the website shows employees who hold multiple positions within either State government or the CSU system. 
The Controller continues to update the site weekly with new information from local government agencies. A list of agencies that failed to file their payroll records with the State can also be found on this website.  Each non-complying agency could face a penalty of $5,000.

Defined Contribution vs. Defined Benefit

"...All Other Pay Cash!"

I was doing some research and found this blurb from the National Institute on Retirement Security:

"Worries about retirement security abound. Families fear that they won’t have enough to support an adequate retirement income as home values and financial markets plummet. Dwindling profit margins have employers looking to cut costs.

And governments are concerned about delivering on the promises that they have made to their citizens and to their employees as tax revenues shrink amid a weakening economy. In this environment, some have proposed replacing traditional defined benefit (DB) pensions with 401(k)-type defined contribution (DC) retirement savings plans in an effort to save money.

But decision-makers would be wise to look before they leap. To deliver the same level of retirement benefits, a DB plan can do the job at almost half the cost of a DC plan. Hence, DB plans should remain an integral part of retirement income security in an increasingly uncertain world because they offer employers and employees the best bang for the buck."

Now that is some smooth writing.  I was almost convinced until I re-read it and noticed "To deliver the same level of retirement benefit..." The author isn't talking about the overall tax burden of the benefit but rather the overhead it takes to manage the benefit system.  I will surmise that the defined benefit plan would cost taxpayers far more in the long term than any overhead created in managing a two-tier system that includes a defined contribution plan.  Further, why not simply offer employees an opportunity to meet with a financial planner so that they can create an individual retirement account?  A generous employer may also choose to contribute a small percentage of the employee's gross annual salary each pay period.  Then, management of the funds becomes the responsibility of the employee and not taxpayers.