A Reasonable PensionTuesday, September 14th, 2010
Author 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.”)