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.

City of Fullerton Employee Sets Me Straight

Below is an email I received from a City of Fullerton employee.  He asked that I keep his identity confidential so I have removed his name and department.  In the interest of fairness I wanted to share this.  Hopefully it will spark some debate regarding pensions and the inequity which exists within the same agency.  The employee wanted to let me know that not all employees are treated as well as public safety. 

Dear Greg,

I have been reading on your website tonight.  There is some information i.e.,

"Further, today’s public employee will enjoy 90% to 100% of their current salary for the rest of their life along with adjustments for inflation."

I work for the City of Fullerton and just wanted you to know that my retirement at the city is through CalPERS, however it is at the 2% at 55 formula, which means if I work for 20 years I will get 2% X 20 = 40% of my highest year's salary.  If I work 30 years I will get 2% X 30 = 60%. 

I think in the above referenced sentence from your web site you are referring to safety personnel who get the 3% at 50 formula; which means if a person becomes an officer at 21 and retires after 30 years at the age of 51 he/she receives 3% X 30 = 90% of their highest year's salary.  Individuals who retire can then go to work at other agencies, like the DA's Office, which is under a different retirement program, thereby making them eligible for another pension.

This is how Chief McKinley got his double pension - and both retirements are/will be paid in full, with no reduction due to the fact that you get two retirements.  When I retire I will be eligible for Social Security as I worked in the private sector.  At the time of my retirement Social Security will call my city retirement a "Windfall", and they will in turn reduce my Social Security benefits since I am now getting a "Windfall" in the form of my city retirement.

Well, just wanted to let you know that the sentence is very misleading as it references "today's public employees"; but does not reference that there are about 10 levels in CalPERS.  I am apparently in the second to the lowest level, i.e. 2% at 55 and the safety personnel are apparently at the top level.

Best wishes tomorrow. 

It was good to get this insider's perspective especially considering how many new employees are brought in from the private sector at age 40+ and the impact (or lack thereof) that their employment will have on the pension tsunami.  Further, this was the ONLY City of Fullerton employee to contact me throughout the election.  Too bad we don't have more who are willing to come forward.