As I gave the idea more thought, it occurred to me that the subject of public employee pension programs deserves a post of its own. I'll throw Social Security into the discussion since it forms the foundation of US retirement in general.
A few facts to get the juices flowing:
Social Security currently benefits 55 million Americans, has $2.7 trillion in the trust fund and, with the reinstatement of the full 6.2% tax in 2013, is funded with $735 billion in tax (half employer and half employee) as well as $110 billion in interest from the trust fund. It will pay out $789 billion. See http://www.businessweek.com/ap/2012-08-12/fact-check-social-security-adds-to-budget-deficit.
State and Local public employee pension funds in 2011 benefited 8.6 million Americans, have $3.1 trillion in assets, and were funded with $40.3 billion in employee contributions, $136.5 billion in government contributions (local & state) and $479.6 billion in interest on assets. It paid out $231 billion. See http://www.census.gov/govs/retire/.
Federal employee pensions cover the military as well as the civilian workforce (including congress).
Starting with civilian employees (including those who work for the military), federal pensions currently cover 1.9 million Americans and have zero assets beyond the "full faith and credit of the United States of America". The government paid out $78 billion. See http://www.fas.org/sgp/crs/misc/98-810.pdf for a description of the plan. See Table 2 of http://www.opm.gov/feddata/retirementpaperfinal_v4.pdf for the number of beneficiaries; it's a lot like Social Security except that the government pays the half that an employer would pay since the government is the employer. The plan is called the Federal Employees' Retirement System (FERS).
The federal Office of Personnel Management estimates the cost of the FERS basic annuity at an amount equal to 12.7% of pay. The federal government contributes 11.9% of this amount and the other 0.8% is paid by employees. There are three other employer costs for employees under FERS. Both the employer and employee pay Social Security taxes equal to 6.2% of pay up to the maximum taxable amount; agencies automatically contribute an amount equal to 1% of employee pay to the THRIFT savings plan (federal version of a 401-K); so where Social Security employers and employees each pay 6.2%, the federal government pays 19.1% to the employee's 7%.
The biggest differences from Social Security are the notion of an accrual rate in FERS, the program reform from the CSRS plan from 1920, the employer/employee contributions and the payout.
The accrual rate is the pension benefit earned for each year of service, expressed as a percentage of the salary base. Under FERS, workers accrue retirement benefits at the rate of 1% per year. A worker with 30 years of service will have accrued a pension benefit equal to 30% of high-three pay (average of highest three years' pay). For employees in FERS who have at least 20 years of service and who work until age 62, the accrual rate is 1.1% for each year of service. For example, a worker under FERS who retires at 61 with 29 years of service would receive an annuity equal to 29% of his or her high-three average pay. Delaying retirement by one year would increase the annuity to 33% of high-three average pay (30 x 1.1 = 33).
CSRS pension accrual rates increase with length of service. CSRS pensions equal 1.5% of high three average pay for each of the first 5 years of service, 1.75% for the 6th through 10th years; and 2.0% of high-three average pay for each year of service after the 10th year. This formula yields a pension of 56.25% for a worker who retires with 30 years of service. Fortunately, this plan has been being phasing out over the last 29 years.
FERS accrual rates are lower than the accrual rates under CSRS because employees under FERS pay Social Security payroll taxes and earn Social Security retirement benefits (although much more than the rest of us).
Members of Congress, congressional staff, federal law enforcement officers, firefighters, and air traffic controllers accrue benefits at higher rates under both CSRS and FERS than do other federal employees. Under CSRS, Members of Congress and congressional staff accrue benefits at the rate of 2.5% for each year of service. This results in a pension of 75% after 30 years of service. Law enforcement officers and firefighters accrue benefits at the rate of 2.5% for each of their first 20 years of service and 2.0% for each year thereafter. Under FERS, Members of Congress, congressional staff, law enforcement officers, and firefighters accrue pension benefits at the rate of 1.7% per year for their first 20 years of service and 1.0% for each year of service after the 20th year. These accrual rates yield a pension equal to 34% of the FERS salary base after 20 years of service and 44% after 30 years of service.
I'm concerned that the payout is one tenth of the Social Security for one thirtieth of the number of beneficiaries: it pays out 200% more per person! What a racket!
Continuing with the non-civilian military (actual soldiers, sailors, etc.), federal pensions also cover about 2.3 million Americans (retirees and survivors) and have zero assets. It paid out $51 billion in 2010. See Page 2 of http://www.fas.org/sgp/crs/misc/R42087.pdf. Military benefits are different from traditional civilian government benefits because of the so-called "20-year cliff": if you're not in for at least 20 years, you get nothing (except GI Bill benefits).
For both military and civilian retirees, the government may also provide up to 4% (matching contributions by employee) of the employees salary to a THRIFT savings plan which is similar to a 401-K. This is only relevant to the discussion of how to pay for the benefits since the federal government must currently borrow this contribution as well.
So for a top-level view, which program would you rather be in?
- Social Security pays out $789 billion/yr to 55 million people for an average of $14,345.
- State and local pays out $231 billion/yr to 8.6 million people for an average of $26,860.
- Federal civilian pays out $78 billion/yr to 1.9 million people for an average of $41,052.
- Federal military pays out $51 billion/yr to 2.3 million for an average of $22,173; not really.
One question that comes to mind is; why are federal civilian pensions so large compared to everyone else's?
I recall hearing the argument that government benefits (pensions) are bigger because salaries are lower than in the private sector. However, Figure 1 in the following link shows that for those with less than a doctorate, JD or MD, it isn't true. See http://www.cbo.gov/sites/default/files/cbofiles/attachments/01-30-FedPay.pdf.
Another interesting fact from the same Congressional Budget Office (CBO) report is that the total wages paid to the 3 million civilian federal workers in 2011 was $200 billion. This means the average wage of the civilians is $66,667 versus the average wage of all other workers of $61,538 (based on $8 trillion in compensation in 2011 for a workforce of 130 million people).
So the answer seems to be that the lawmakers are watching out for themselves at our expense.
So the answer seems to be that the lawmakers are watching out for themselves at our expense.
Similarly interesting is the fact that the total wages paid to the 2.5 million active and reserve military personnel was $100 billion for an average wage of $40,000; so the $51 billion in pensions is roughly 51% of the amount paid in wages even though only those who stay at least 20 years receive a pension. See the summary on Page 1 of CBO document http://www.cbo.gov/sites/default/files/cbofiles/attachments/11-14-12-MilitaryComp_0.pdf.
Military pay runs from $1379/month for a newly enlisted GI to $15,647/month for an officer (General or Admiral) with 20 years. A General's pay hits $19,240/month after 38 years.
Aside from the inherent danger of soldiering, this is not a bad gig; Colonels make about $110,000 after 20 years and can retire at age 45 with a 50% pension (2.5% of average of best three years' pay for each year of service) and 70% of medical costs in insurance coverage.
You know what, I'm OK with that. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.
I'm not OK with the civilian side of the equation. The average pension of $41,052 is 61% of their wage and they don't (generally) risk life and limb to earn it. Except for law enforcement field officers, intelligence field agents, overseas diplomats and actual firefighters, this is ridiculous. It seems to me that we should move these folks directly to Social Security and Medicare, no questions asked and there should be no complaints. If there are complaints then we, as their employers, should indicate the direction to the door.
I'm also not OK with the state and local pensioners taking an average of $26,860 in yearly retirement benefits. State and local governments employ 14.4 million people full-time and 4.8 million people part time for wages of $840 billion ($768 billion for full-time). This gives an average full-time wage of $53,334 so pensioners are pulling down a bit over 50% in retirement. While I'll admit the average wage here is 14% lower than the average wage in America, I don't think it justifies the higher retirement benefits. See Fact #2 at http://www.cbpp.org/cms/index.cfm?fa=view&id=3261.
I'm concerned that the payout is one third of the Social Security for one sixth of the number of beneficiaries: it pays out nearly 100% more per person. Again, what a racket!
Some local governments are allowing themselves to be bankrupted by these ridiculous retirement benefits; this is childish behavior since everyone suffers for the benefit of a few. Some state and local governments are changing their laws to deal with the reality of the fact that these benefits are simply not sustainable without increasing government spending beyond the existing 43% outlined in the preface of this blog. The federal government must do the same.
Just pushing all of these people (with the exceptions noted) into Social Security will enable about $40 billion of extra payments on the national debt. The $3 trillion in the combined local and state assets could be used to pay down the debt as well (before Congress spends it on something else). The states and local governments would have the burden off their backs, the national debt would be reduced and the inequities I've just described would be gone.
Meanwhile, my school model would still be producing a $300 billion/year surplus. This will contribute another $75 billion in federal income taxes that, together with the $40 billion of state/local employee contributions and $14 billion of federal employee contributions could be used to bolster the Social Security trust fund and provide unemployment benefits and retraining for the thousands of displaced principals my school model produces.
And finally, the best part: the $300 billion in school savings plus the $24 billion in federal pension savings (12% of $200 billion) and the $96 billion in state/local pension savings (reducing government contributions to the same level as employee contributions) tallies up to $420 billion per year. This is a real reduction in spending of 6% of GDP across all of American government, reducing the total to 37% of GDP.
Aside from the inherent danger of soldiering, this is not a bad gig; Colonels make about $110,000 after 20 years and can retire at age 45 with a 50% pension (2.5% of average of best three years' pay for each year of service) and 70% of medical costs in insurance coverage.
You know what, I'm OK with that. The whole idea of government pensions goes back to the Revolutionary War and the gratitude the new nation felt toward it's liberators. They deserved it then and they still do.
I'm not OK with the civilian side of the equation. The average pension of $41,052 is 61% of their wage and they don't (generally) risk life and limb to earn it. Except for law enforcement field officers, intelligence field agents, overseas diplomats and actual firefighters, this is ridiculous. It seems to me that we should move these folks directly to Social Security and Medicare, no questions asked and there should be no complaints. If there are complaints then we, as their employers, should indicate the direction to the door.
I'm also not OK with the state and local pensioners taking an average of $26,860 in yearly retirement benefits. State and local governments employ 14.4 million people full-time and 4.8 million people part time for wages of $840 billion ($768 billion for full-time). This gives an average full-time wage of $53,334 so pensioners are pulling down a bit over 50% in retirement. While I'll admit the average wage here is 14% lower than the average wage in America, I don't think it justifies the higher retirement benefits. See Fact #2 at http://www.cbpp.org/cms/index.cfm?fa=view&id=3261.
I'm concerned that the payout is one third of the Social Security for one sixth of the number of beneficiaries: it pays out nearly 100% more per person. Again, what a racket!
Some local governments are allowing themselves to be bankrupted by these ridiculous retirement benefits; this is childish behavior since everyone suffers for the benefit of a few. Some state and local governments are changing their laws to deal with the reality of the fact that these benefits are simply not sustainable without increasing government spending beyond the existing 43% outlined in the preface of this blog. The federal government must do the same.
Just pushing all of these people (with the exceptions noted) into Social Security will enable about $40 billion of extra payments on the national debt. The $3 trillion in the combined local and state assets could be used to pay down the debt as well (before Congress spends it on something else). The states and local governments would have the burden off their backs, the national debt would be reduced and the inequities I've just described would be gone.
Meanwhile, my school model would still be producing a $300 billion/year surplus. This will contribute another $75 billion in federal income taxes that, together with the $40 billion of state/local employee contributions and $14 billion of federal employee contributions could be used to bolster the Social Security trust fund and provide unemployment benefits and retraining for the thousands of displaced principals my school model produces.
And finally, the best part: the $300 billion in school savings plus the $24 billion in federal pension savings (12% of $200 billion) and the $96 billion in state/local pension savings (reducing government contributions to the same level as employee contributions) tallies up to $420 billion per year. This is a real reduction in spending of 6% of GDP across all of American government, reducing the total to 37% of GDP.
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