Wednesday, November 4, 2009

Is Government Spending Too Much On Pensions?

Pension and retirement benefits for public sector employees exceed the benefits received by their private sector counterparts, costing taxpayers millions every year. It is no surprise that California, Illinois and Pennsylvania -- all states that experienced big problems balancing their budgets this past year -- also have large numbers of public sector retirees receiving $100,000 or more a year in pension benefits. See the following post from The Mess That Greenspan Made.

Combine a burst housing bubble (and all the attendant vanishing tax revenues) with poor investment returns and a system that was unsustainable to begin with and you have the public pension system in California as reported by Bruce Bialosky at Town Hall.

The law gives the employee pension benefits of 3.0% of their final income for each year of service. It also made the 3.0% amount retroactive to the beginning of their employment period. That means if you work 20 years you receive a pension benefit equal to 60% of your final income. The problem was compounded by how they calculated the income on which to base the pension.

Everything including the kitchen sink adds to the final income level. Things such as auto allowance and bonuses boost the final number. If the employee did not use vacation pay or holiday pay for the prior 10 years that adds to the base salary to determine the income. Understanding that in most private sector jobs when you do not use your vacation, you lose your vacation, the ability to accumulate vacation time opens up the system for vast manipulation. Peter Nowicki, the Moraga Orinda fire chief, retired at age 50. His final salary was a whopping $185,000, but small compared to his annual pension benefit of $241,000. Making that matter worse, Nowicki was hired as a consultant to the fire department for an additional $176,000 per year -- on top of his retirement benefit.
Caution would probably be advised here as we have friends and relatives in both California and Pennsylvania who are retired from the state educational system, now benefiting from this sort of government largess (though not to the same degree as the fire chief above).

It's probably no coincidence that both states had big problems balancing their budget this year and would have had to let thousands of workers go if not for the many billions of dollars that came pouring in from Washington D.C.

Last I heard, there were more than 4,000 retired public sector employees pulling down more than a hundred grand a year in California with Illinois apparently not far behind as reported here. Over the years, cities such as San Diego have been rife with double-dipping like Chief Nowicki above, what does not appear to be an isolated case.
In Los Angeles County there are over 3,000 people receiving greater than $100,000 per year in pension benefits. In San Francisco, it was found that 25% of employees’ income spiked up over 10% in the final year of their work. The San Francisco grand jury found that amount cost the city $132 million.

Some would argue why not game the system? Let’s say you start working for the government when you are 30 years old and work for 25 years. Your final income with all the fancy calculations ends up at $120,000. That means you would receive $90,000 plus full health care benefits. You can either live on that very nice retirement or you are free to get another position. After all, being 55 years old, you are still in your prime earnings years. Where in the private sector are there comparative opportunities?
Private sector employees now receive less annual income than their public counterparts. Private sector employees will have to work well into their seventies to pay for these public sector employees’ retirement benefits which far exceed what the private sector offers. The public will, little by little, become aware of this upside-down arrangement.

The voters in California sent a strong message earlier in the year when they rejected the budget changes proposed by Sacramento and that's probably just the beginning (of course, lots of people are now voting with their feet in the Golden State).

It's funny that those who work in the public sector (at least the ones that I've spoken to on subjects such as this) have absolutely no appreciation for balancing budgets and making ends meet given the realities on the ground.

On the topic of "fixing" the public schools, one recent conversation went like this:

Retired teacher: "Doubling the number of teachers and cutting the classroom sizes in half is the only surefire way to provide consistently better education. You can't have 35 kids in a classroom and expect a quality education."

Me: "Where does the money come from to pay all these teachers?"

Retired teacher: "The taxpayers!"

This post has been republished from Tim Iacono's blog, The Mess That Greenspan Made.

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