Friday, September 10, 2010

Who is Stealing Your Retirement?

A few weeks ago I wrote a tale about Jack, an employee in Corporate America who has seen his pension whittled away over the past two decades. Jack, and Jill, and many others like them who work in the private sector, have had to adjust to a new world where 401K plans and their own savings will need to carry them through their retirement. If they will get any pension at all, it will be significantly less than what they were counting on when they started working twenty or thirty years ago.

But there’s another side to this story that is begging to be addressed – there are still workers who will be getting a pension.

Yes, many employees in the public sector – including teachers, cops, and politicians – are still guaranteed pensions that will replace a very healthy amount of their salary in retirement.

Consider the story of The Millionaire Cop Next Door, written by Rich Karlgaard for Forbes. Karlgaard writes that government workers are “America’s fastest-growing group of millionaires.” He estimates the value of an $80000 annual pension plus full medical benefits to be worth about $2 million.

The New York Times Ron Lieber writes that there is a war looming over public pensions. Lieber lays out the case for states to scale back their pension commitments. He cites a study by the Pew center that estimates the gap between the pension commitments and the pension funds to be one trillion dollars.

I say, bring the war on.

At least two states, Colorado and Minnesota, have started the war by taking steps to bring their pension deficits in line. They have passed laws that would (among other things) eliminate cost of living increases for retirees and increase employee contributions. Their retirees are suing the states.

There is no doubt that these public sector employees have lived up to their end of the bargain. And yes, this means they won’t be getting what they were promised. But this inequity between private sector and public sector employees (who have worked equally hard for what they have) is essentially a re-distribution of wealth.

These are pensions that are funded with tax dollars.

So while the private sector employee is struggling to invest money from his own $76 thousand dollar salary in an effort to retire in his late sixties, his taxes are being raised so that he can fund his neighbor’s government pension. I am not at all undermining the job that our teachers and public servants do – they are well appreciated. But is it equitable that the cop in Carlsbad, California that Karlgaard writes about should be able to retire at age 50 with an annual pension of more than $76 thousand dollars for the remainder of his life?

Sound fair? It’s not.

How long will it be before our lawmakers have the guts to take their own pensions and benefits to task? How long can this inequity between private sector and public sector continue? What’s your take?


Liz Fichera said...

Interesting post. Unfortunately finding lawmakers with guts is half the problem.

The thing that troubles me is the "guarantee" of a pension, cost of living increases, even a job, etc. I guess I don't understand that mentality.

Anonymous said...

I agree that the benefits for our politicians need to be reined in, but without seeing the analysis of the $80000 pension being worth $2 million I am reluctant to comment on this as a similar analysis could probably be used on many workers in the private sector to show that their salary plus benefits are worth millions as well.

Statistics can be phrased in such a way as to be truthful but slant the results the way the presenter wants for their point of view.

I am concerned that if we start going after pensions for police, firefighters, and teachers, then next will be the military. For police, firefighters, and military, they put their lives on the line for us every day for 20-30 years and thus have earned their pension benefits in my opinion.

Recently saw on the news where some small middle-class towns in California have higher property taxes than Beverly Hills, had to lay of workers recently, and then the townspeople discovered that the city administrator was making $860K a year and the chief of police was making $457K a year. These are the excesses that need to end as those individuals if they retire would receive a pension of close to their current salaries.

In the state of Missouri, the state employee pensions for new hires has changed. They have to contribute to their pension(like a 401K) and they have to work until age 55 and their age plus years of employment by the state is equal to 85. Previously, it was age 50 and 30 years of service. I expect other states to adopt similar measures to keep budgets in line and reduce the differences in public vs private retirement.

I am not holding my breath for the politicians to limit their retirement benefits.

KarenG said...

As the baby boomers seek retirement, it's going to be.... well, I don't know. But it can't be pretty. I spoke to a friend yesterday whose husband's pensions had disappeared, as he had worked for 2 different unions. *corruption, anyone?* Course the govt will bail out the unions so this couple will probably be ok.

Carol Kilgore said...

It's a huge question with no easy answer. The economy is so out of whack, it's almost as if we need a total do-over. Boggles my brain, for sure.

Liza said...

I second what Carol Kilgore wrote.

Colette said...

Anonymous, I'm not suggesting we take away any pensions for the military - or for anyone else. I am suggesting that the public sector needs to figure out how to balance their books and live within their budgets. The major beef is that I see private sector being cut to the bone, while the public sector is spending through the nose. It's all about the balance sheet.

Yikes! I sound like a Republican!

Karen, Carol, Liz, Liza -- yes, the next few years will be very interesting.

Greg said...

Hi Colette, this debate is taking place worldwide, see strikes in France, demos in UK etc. I agree with you in general. But knowing some policemen who have jobs that are off the scale for stress I would not stop them from retiring early. However the cost of living 'automatic' increases must go and the overall package must be trimmed everywhere. Your point on redistributing wealth is well put.

Colette said...

Greg, thanks for pointing out that this is a worldwide problem.

Anonymous said...

I definitely think there needs to be some sort of reform of public. But I really think retirement planning is a matter of personal responsibility since there are no guarantees. Ever since I graduated 5 years ago, I made up my mind that my retirement funds are my responsibility. Given that people move from job to job more frequently now, face unexpected layoffs, and an increasing likelihood that SS will not be there for me when I retire in 40 years or so, I decided I need to max out my ROTH IRA, carefully monitor how I allocate my assets, and not rely on any pension from any employer, public or private. Some may say I'm too conservative, I think I'm just being realistic.

Colette said...

Anonymous -- good for you! You are not too conservative, you're smart!

Anonymous said...

Since my first anonymous post "I agree that...", I have seen a proliferation of news articles and blogs on this subject. After reading some of them, I have a few additional thoughts.

1. Most financial companies which manage 401Ks and IRAs show graphs that discuss contributing the maximum amount from age 25-35 and then you can stop contributing and still retire at 59 as a millionaire. Since many of the public pension plans require workers to contribute for the 25-30 years that they work, they would have a similar outcome as the 401Ks participant. At this point, public sector employees are contributing to their pensions just like private sector employees are contributing to 401Ks.

2. Public Pension plans invest in the stock and bond markets so when the market was hammered recently, the value of the plans dropped dramatically. Most of the plans are professionally managed like 401K and IRA mutual funds and had the same assumptions about the ability to have 8 percent or higher growth over time.

3. Many states including New Jersey have not contributed their match to the employees contribution over the last 20-30 years anytime a budget shortfall occurred. In fact in California, the state looked at the pension fund as having a surplus and raided it to balance the budget over the last 20 years. The lawmakers believed that investment growth would compensate for the contribution shortfalls. This fallacy of "growth will compensate for contribution shortfalls" is a reason so many people in both the public and private sector do not save enough and has led to many problems in the public sector as assumptions about "growth rate" fueled public projects that when the "growth rate" did not hit the projections, the projects are now liabilities.

4. Most states have enacted or are enacting legislation to exclude part-time employees from being eligible for pension benifits, increase worker contributions and raise retirement ages, and reduce benefits.

How we prepare for our retirement is an issue that we are all having to grapple with in both public and private sectors. We must make sure that we do not demonize either the public workers who provide the necessary government services or the private workers, but rather hold our elected officials to tell us what they are doing to address this issue. It is our responsibility and the responsibility of the press to monitor our elected officials and be sure that they are doing what they say; i.e. they are walking the walk as well as talking the talk. If we don't watch our officials and contact them with our concerns and vote, we are equally responsible for the mess as we turned a blind eye to how our government is being run.

Colette said...

Anonymous, it's always okay to disagree with me!

Anonymous said...


We are in agreement that we can disagree. I re-read my last post and did not mean to imply that you were "demonizing" anyone, but rather it is a trend that seems to occur in the discourse. If you did read it that way, I apologize for that.

I enjoy your posts as they are informative, thought-provoking, and timely. Most often we are in close if not full agreement.


Colette said...

Mike, the interaction here is what makes it great. Please keep the comments coming, and don't hold back! Agree, disagree, it's all good.