A Reasonable Pension
Tuesday, September 14th, 2010Author Tony De Maio
Folks, please forgive my insistence, but you’ve GOT to listen to Air America. It is so educating. Yesterday, a guest stated, “California cannot afford the retirement system of the public employees.” The host(ess) chided the guest saying, “A person should have a reasonable pension.” (Note the disconnect. One person says, “We can’t afford it”; the other says, “We MUST afford it.” Is there some estrangement from reality here?)
It is quite apparent the host knows little about the Public Employees Retirement System (PERS) in California. Being a former State of California employee/manager and a recipient of the benefits of the State of California’s pension system, I am somewhat aware of the manner in which it works (or, at least, worked when I retired)—perhaps “functions” is a better way to state it.
First, some background. The state workforce can be divided into two classifications: Clerical and professional. Historically, the working level professional used to be Associate level. Over the years, “grade creep” has advanced the working level to Senior level. An Associate makes about $70,000 per year and a Senior makes about $85,000 per year. There are two ways to “make it” to the professional ranks in State Government.
1. Go to college and get an AB degree. Enter at the trainee or junior professional level. In 4 years the person will be Associate. In another 2-3 years, they will be at top step. The person will probably make Senior ($85,000) in the next five years.
2. Enter the state work force as a clerical (perhaps right out of high school), take tests, make “contacts”, and eventually get accepted to a trainee position at the professional level. This usually takes about 5 years, but cute women and minorities have been known to make it in far less time. In 5 years, the person will be at top step Associate making about 60,000/yr. The person will probably make Senior ($85,000) in the next five years.
Once you are in a professional position, there is almost a guarantee that you will become (at least) an Associate and most probably a Senior. With Civil Service protection, there is almost no chance of being fired; as a government job, there is little chance of being laid off. Benefits such as 12 holidays, over 4 weeks paid vacation (after enough service), 12 sick days, paid military and jury duty, paid medical (including drugs) and dental, paid training and education make the job financially rewarding in addition to being secure.
Retirement is provided via a state retirement plan (PERS—a defined benefit plan), a 457 retirement plan, a 401(k) plan, and Social Security. The state (PERS) retirement benefit is computed by multiplying three factors together:
1. Age (or an age factor—it is somewhat arbitrary and subject to negotiation)
2. Years of service
3. Pay—based upon the last year before retirement
The “age factor” is somewhat complicated. If one retires at age 50, the age factor is 1.1%. If one retires at age 55, the age factor is 2%. If one retires at age 63, it is 2.5%. There are other values in between these ages. An example may help:
Consider a person at age 55 making $50,000/yr that has worked for the state 20 years. Such a person would obtain a PERS retirement pay of:
2% (age factor) x $50,000 year (last year’s pay) x 20 (years of service) = $20,000/yr.
(Occasionally, the state will “throw in” a few extra years of service credit or a higher age factor when they wish the older, higher paid employees to retire.)
NOW, let us consider our high school graduate that entered State Government right out of high school. Let us assume that she retires after reaching Associate level, and that she was 18 when she entered State Government. Her retirement will be:
2% x $60,000 x 37 = $44,400/yr if she retires at 55 (75% of salary)
2.5% x $60,000 x 45 = $67,500/yr if she retires at 63 (110% of salary)
Such is our host’s concept of a “reasonable retirement”. But, it gets better.
If she has been a “good and loyal” employee, they will jump her in grade for her last year. The “salary” upon which PERS benefits are based is THE LAST SINGLE YEAR of service. Hence, they will usually jump folks a couple of grades for their last year. Their duties don’t change, just the pay. (I have observed cases where a 25-year veteran clerk was promoted from her clerical position to a very high level professional position for the ONE-YEAR BEFORE SHE RETIRED.) So, they jump the person 20% to about $85,000 a year. (Note: this is Senior level, a level she has probably already reached. They would probably jump her a few levels higher than this.) NOW her PERS retirement benefit is:
2% x $85,000 x 37 = $62,900/yr—about 85% of her true pay. (at 55 YEARS OLD)
2.5% x $85,000 x 44 = $93,500/yr—about 128% of her true pay. (at 63 YEARS OLD)
Not bad for a high school graduate, probably with no skills other than on the job training and what the State paid for. This is what the host calls a “decent” retirement??? But it gets better. This pension is tied to the cost of living, so it goes UP every year.
AND, even better!! They have a plan called the “retired annuitant employee” where they can hire a retiree at their LAST RATE OF PAY and work them for up to 9 months. They are paid IN ADDITION to their retirement. Until last year’s law change, the employees could then draw UNEMPLOYMENT for the other three months. That works out to be:
$70,000 x .75 (9 months) = $47,250 — $85,000 x .75 (9 months) = $70,830
In addition to THREE MONTHS OF UNEMPLOYMENT. (about $6,000)
THIS is what the host calls a “decent retirement”. But it gets better still. Any “sick days” not used are ADDED to the years of service—which could be as much as two years.
AND, even better, at 62/65, the employee qualifies for Social Security. As such, the person will get an additional $25,000 or so in Social Security benefits.
Of course, this is in addition to any 401(k) or IRA or savings they have as an individual. (Though with this kind of retirement provision, I know of no reason why they should save for retirement.)
Based upon $60,000/yr, 45 years service, 63 years of age, and working as a retired annuitant, the “decent retirement” the host says “everyone is entitled to” works out to be:
$67,000 PERS “basic” pension; $25,000 Social Security; $45,000 Retired annuitant salary; $6,000 Unemployment insurance or $143,000/yr. If the person made $70,000 their last year, then the amount is $77,000 + $25,000 + $52,000 + $6,000 = $160,000. Of course, medical, drug, and dental insurance payments are also made, and the pension goes up with the cost of living.
(As an interesting “aside”, the person that went to work for the state right out of high school will have an extra 4 years of service with the state, so will actually achieve a HIGHER retirement than the person that went to college–assuming they both retire at the same rate of pay. The college educated person will probably also have student loans to pay off.)
As a comparison, the approximate MAXIMUM (depending upon district) salary for a TEACHER in California is about $55,000. The way you get there is to go to college for 4 years, then go an additional year to get your credential. Get a job and begin working. Go to school part time to pick up the MA. Then go additional years part time to get an additional 30 units or so beyond the MA. Work in the district for 10/12 years to reach maximum pay.
Thus, ten years after high school graduation, the high school graduate that went to work for the State is making about $60,000/yr; the teacher is about 5 years into the work force making about $40,000/yr with hopes of getting to $55,000 in five years. Five years later, the teacher is “maxed out” at about $55,000; the high school graduate is “maxed out” at $70,000. With any luck, the teacher’s student loans are paid off. The high school graduate should have tens of thousands of dollars in various retirement plans.
But then, EVERYONE “deserves” what the host calls a “reasonable” rate of pay.
The teacher may retire at 50 with 30 years service. (Clearly, unlikely! The only way that could happen is if the teacher started teaching at age 20!) The state employee may reasonably retire at 50. The age factor for the teacher is 2% at 60; for the state employee it is 2% at 55. The state employee is eligible for Social Security; the teacher is NOT. Teachers get no medical benefits.
Isn’t it terrible how the “poor folks”, those with no college education, those that don’t “know any better” consistently get screwed by the system? They don’t even get a “reasonable pension”!!
So folks, I ask YOU instead of the host, since the host has already made her feelings and beliefs known. Do YOU think the people of California can afford this pay schedule and retirement plan? A pay schedule where a high school graduate with no real skills or training makes twice as much as the average citizen, has great benefits and security, and then retires (early) at full pay—or more. Are you aware that California is going into debt at the rate of about 2 million dollars a day? Do you know that the middle class, capital, and businesses (i.e. the tax base) are fleeing California? The three states with the greatest job growth are Arizona, Oregon, and Nevada—they all border California. One theory is that it’s the businessmen leaving California to start businesses in those states. Yet, our host states, “We MUST afford it. The POOR people NEED it.”
It is disconcerting to ME how people who have absolutely no knowledge of the true state of affairs speak sanctimoniously and with authority and certainty in a knee jerk (good word) fashion how the “poor people” are being cheated and “need” a “decent” pension plan. It is even MORE alarming that it happens so often and on so MANY topics.
(The history of this situation is quite simple. A past legislature promised these “future” benefits to the employees instead of a giving them a pay raise. The legislature kept the pay raise money, spent it, and stuck the future legislatures with the bill. Subsequent legislatures, instead of funding the retirement system agreed upon, made unreasonable assumptions about rates of return that could be obtained so they could keep the retirement monies instead of contributing them to the retirement system. They then spent THOSE monies. Thus, the system went under-funded for many years. The legislators that made the promises are now long gone, and the present State Government has been stuck with the bill for the party that happened years ago. At this time, it is unlikely that enough money can be obtained to “catch-up” and save the system under the present [agreed upon] benefit payout plan. So much for “responsible government.”)
Related posts:
Desertrat says:
September 14th, 2010
7:44 am
All manner of happy little cliches come to mind. “Sow the wind, reap the whirlwind” is one of them. California is broke and going broker. Tough. That state government has been controlled by people with the same sort of mindset as the Air America hostess, and so now we’re back to chickens and roosts as the next cliche.
Frankly, I don’t care. I’ve been a saver and accumulator, and have been debt-free for decades. I live better than those retirees and on 1/3 to 1/4 of the income. “Sympathy is a word in the dictionary. lying between (bad smelling brown stuff) and (deadly social disease).”
And the only radio down here is Mexican C&W.
Cheri says:
September 14th, 2010
8:45 am
Tony,
The disconnect you described is an intellectual disconnect from reality and responsibility. Too often an untruth(wish)is stated as a truth and others are expected to buy it and promote it. Then support/out rage is pumped up for it not existing as though it could have or did at one time and someone(Rich, powerful, different group) is selfishly preventing it. In a different environment it would be considered a mental illness or at the very least delusional.
Living here in CA, I have often wondered if I am part of the “problem”, i.e. I think/believe things are a certain way therefore I am “prejudiced” to solutions that affirm my conclusions.
For clarification, I believe in math, I believe in GOOD science, I believe in observation and I do not believe I am the divine decider in the universe.
I have engaged in too many conversations/arguments with this type of individual.
“How do they expect me to live on that?” (Not “they” problem)
“He/she is a good person, they deserve…”
“Why don’t I deserve…?” (Only God can answer that, he is the one keeping track.)
“Due to no fault of their own…” (How do you know?)
“I dedicated all these years, I deserve…”
Notice there is no I produced and saved and have in those statements. Just the magical leap to having it.
Tony thank you for not mentioning the correctional officers (age 55) retirement of 110% your highest salary, to which most local and state agencies have parity.
HOW can a person “earn” more in the last thirty years of their life not working than they did in 20 to 25 years of working spending every dime they earned? Even with Tony’s compound interest it is not possible. No money was ever saved or invested to yield what is needed. These systems survive on future payments by new members/citizens, making them ponzi schemes.
This and all CA’s problems are going to be fixed when they legalize Marijuana and can collect all those taxes and spend less on the war on drugs. Everything is possible in delusion, reality just gets in the way.
‘Cuse the rant. Like the article.
Cheri
Linda Brady Traynham says:
September 14th, 2010
12:37 pm
Tony…you’re incredible. Californians are insane, Cheri, good to see you back.
Kurt says:
September 14th, 2010
1:07 pm
These are the people that keep getting elected by promising to make it so. Don’t bother them with facts, nothing but feelings matter, and they feel like it should be this way. I really do wish I could video tape the look on their faces when reality forces itself on them. Problem is though, even then some of them will refuse to accept it. It’s their religion: believe and it will work that way.
Steve Foste says:
September 14th, 2010
4:15 pm
When I graduated from college in 1977, the next month I went to work for the Government, worked there for three years and moved on. A year and a half ago, I wrote my former wife an email, Ahuggg!! What bad choices I/we made. I could have retired today if I wanted too.
That was thirty years ago, I didn’t have a crystal ball.
I once figured out that the opportuinty cost of going to college cost me about 70,000 dollars and that was 30 years ago. Now I know that I would not have been smart enough to have invested that money, but the thought of what it would be worth today, and skip the college is a bit overwhelming.
I have a daughter now who went to collge, but didn’t earn any degree that is worth while, now what? We are working on it. Again that opportuity cost comes to mind.
Tony says:
September 14th, 2010
5:26 pm
DesertRat
suggest you look into Sirius/XM.
I had the same problem living in Georgia–though we also got NASCAR.
always,
tony
Tony says:
September 14th, 2010
5:30 pm
Cheri,
It ain’t just the prison guards (I refuse to let my language be hijacked.)
Prison guards come under a special heading of “safety officers” or “safety personnel”. Recall the “age factor” I referenced. Remember I said it was “arbitrary” and “negotiable”? For “safety officers”, that factor is 2% at 50.
Now, just WHO is a “safety officer”? Why, the director and top (politically appointed) politicos of DMV, among others.
Starting to get the picture?
always,
tony
Tony says:
September 14th, 2010
6:00 pm
Actually, as designed, the pension system was quite good. The problem is that the politicos got involved, and the parasites and leeches found out how to “work” the system.
For the “normal” employee, it is not only possible to retire at 100% of pay, but it is easily accomplished. It’s when you screw around with the system you get into trouble on a macro level.
Recall my “How to get rich” formula #1–the annuity:
Amount = payment * (1 + interest)^time-1
———————
Interest
Let us assume 10% rate of return. Then in order to achieve “full salary”, you would need to have a “kitty” or nest egg equal to 10 times your salary. Now, at one time, the employee contributed 5% and the employer contributed 5% to the employee’s retirement–or 10% total. Hence, the amount of time it would take to achieve full salary retirement is given by:
10 * salary = (10% * salary) * (1 + .10)^time – 1
———————————–
.10
Salary cancels out, as does the “.10”. Simplification yields
10 = (1.10)^time -1
11 = (1.10)^time
It takes logs to solve this, but trial and error will yield 25 years. Hence, clearly it is reasonable for a guy that starts with the state at 20 to retire at 45 at full salary, and never deplete the principal.
The present system is a rip-off, since at death, the employee loses his “kitty”.
The “problem” is the games the folks play with favored employees and the legislatures that did not fund their share of the retirement system over time. They preferred to make unreasonable assumptions about the rate of return and spend the retirement money elsewhere.
always,
tony
Desertrat says:
September 14th, 2010
6:51 pm
I’ve thought about Sirius radio, although not seriously.
I tune the DirecTV to the musical oldies, sometimes. Channel 802, the ’50s, is my era. And, Classic Country, sometimes. Otherwise, I’m doing chores or repairs or messing on the Internet. Gotta watch college feetsball and Formula 1 racing, of course…
Tony says:
September 14th, 2010
8:47 pm
Desertrat
X/M (as I bought it originally) is quite good on trips. If you’re traveling across country, you are constantly getting into and out of range of stations, and searching for one that is acceptable.
I did fairly well with X/M, buying it low and selling high. It worked so well that I bought Sirius. NOW, I’m pushing the company so hopefully the stock will go up enough so I can unload it.
Cheri says:
September 14th, 2010
10:54 pm
Tony-Didn’t mean to hijack your language (not really sure how I did). I concur with your paragraph regarding the “problem”. When those pension systems run out of money, how will they be funded? Tax revenues?
The reward for the college educated is that they a-went to college and b-have the vocabulary to talk over the heads of the non-college educated. Isn’t that enough? I apologize for my snide and cynical comments, some days I am just fed up with the insanity and I refuse to take psyche meds to “make it all better”.
Cheri
Cheri says:
September 14th, 2010
10:56 pm
Linda,
I have been here, reading. Just couldn’t comment due to computer/Internet issues. I typed up many comments that never made it out of my computer.
Cheri
Tony says:
September 15th, 2010
7:24 am
Cheri,
YOU didn’t hijack the language. Matter of fact, you’re a “victim”.
Prison guards are prison guards. Several years ago, they were “upgraded” to “correctional officers”. Much like “gay” used to be a perfectly good word, as “homosexual” was, along with the generic “he” to refer to both sexes.
As Saul Alinsky says, “If you control the language, you control the argument.” If you read “1984″, you may recall how “language control” was quite important.
always,
tony
Oldmanriver says:
September 15th, 2010
9:31 am
Tony,
LoL then who upgraded turnkey, jailer, screw, gaoler to the grandiose
prison guard. hahahaha
Tony says:
September 15th, 2010
10:23 am
OMR,
Tony says:
September 15th, 2010
10:25 am
OMR,
Reminds me of the time I went into my bank and found out that the manager of my bank was no longer the manager of my bank. She was a “relationship manager”.
I wuz fer that, until I got my face slapped.
always,
tony
Oldmanriver says:
September 15th, 2010
10:40 am
Tony,
I always like, how in banks everyone is a vice president. Relationship manager is a new one for me lol. Was that a step up or a step down for her? Garbage men became sanitary workers. Hookers are now sex workers…seems like relationship manager would fit better here. lol
Cheri says:
September 15th, 2010
3:15 pm
Tony,
So, based on your response to me: 11 = (1.10)^time
Social Security should provide close to my full salary at 65 since, I have/am contributing >5-7% annually and so have my employers which is significantly greater than 10% annually and I will pay into it my ENTIRE working life, 36 years and counting (albeit 26 professionally so far) with roughly 19 to 20 more to go.
I have only considered SS as a supplement. I had a successful money person, I housesat for in Marin county(his kids’ Godfather is Charles Schwab)tell me in the mid 80′s not to count on SS. That it would be bankrupt. So I haven’t. I also failed to consider what it could have or should have been. My bad!
I need to read 1984 again although it seems passé….
Cheri
Tony says:
September 15th, 2010
4:50 pm
Cheri,
You have NO IDEA just how bad a deal Soc Security is. I wrote a paper on it. I’ll send it to Mike again.
always,
tony
James the Wanderer says:
September 16th, 2010
8:13 pm
Don’t get too upset; all this will stop when the rest comes crashing down. Too many grifters, too many parasites, too many who think money grows on trees and won’t realize the need to work for it.
I don’t look forward to burying the stupid, but there’s nothing to be done about it except get a few shovels. We’ve ignored reality long enough, but reality isn’t about to ignore us.
Watching strange things going on in the stock market – my IRA is UP right now, for no reason I can see except stock picking: mostly oil, gas, gold & silver, a few blue-chips. This too will pass, and hopefully I’ll sell quickly enough to keep most of it. Gonna need to buy more food, though, the Crunch may last longer than I thought.
Greetings to all, and best wishes from the Western deserts!
Tony says:
September 17th, 2010
7:00 am
James,
Wot’s the old saw?? You deal with reality or it will deal with you.
I dated a gal once who was a real beauty. She thought she wasn’t. She had real problems.
I don’t get upset about it. If I can do something, I’ll try and do it; if I can’t, I’ll ignore it and do something about things I CAN control. No point in getting upset and/or worrying about anything.
Tony lives by two rules:
1. Don’t sweat the small stuff
2. It’s ALL small stuff
Thanks for the suggestion–I hadn’t thought about shovels
always,
tony