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Public pensions aren’t villains

By Jennie L. Phipps · Bankrate.com
Thursday, November 7, 2013
Posted: 6 pm ET

Where I live -- just south of Detroit -- whenever the topic of public pensions arises, the retirement planning conversation swerves to an angry discussion of undeserving retirees with astronomical pensions bleeding the public till.

The Detroit -- and the nationwide -- reality is nothing like that, with average pensions closer to $22,000 a year, according Alicia Munnell, director of the Center for Retirement Research at Boston College. But that number is a little misleading, too, because it includes part-timers and people who left their jobs years before they retired. Reality is somewhat higher, including some $100,000 pensions going to the likes of former high school principals and city police chiefs. Does anybody really begrudge them that kind of comfortable retirement? The bottom line, Munnell says, is that "people aren't getting rich off public pensions."

She and a team of others from the center just released an analysis that responds to allegations in the wake of the Detroit bankruptcy that numerous cities are going broke because of exceedingly high obligations to pay pensions to city workers and teachers. Her team concludes that the average city's overall pension debt represents about 7.9 percent of its total revenue base. Among a sampling of 173 cities, average costs ranged from 12.3 percent of total revenue at the high end to 2.7 percent of revenue at the low end.

"To hear people talk, you would think that it is 30 percent or 40 percent, but when you look at the actual amounts, it is far below that," Munnell says.

Among the cities studied, these are the 15 with the highest pension costs as a percentage of revenue:

  1. Little Rock, Ark., 17.6 percent
  2. Chicago, 17 percent
  3. Aurora, Ill., 16.4 percent
  4. Charleston, W. Va., 15.7 percent
  5. Reno, Nev., 15.5 percent
  6. Springfield, Mass., 15 percent
  7. Bakersfield, Calif., 14.5 percent
  8. Stockton, Calif., 14.1 percent
  9. Saginaw, Mich., 13.8 percent
  10. Portland, Ore., 13 percent
  11. New York City, 12.9 percent
  12. Santa Ana, Calif., 12.7 percent
  13. Fresno, Calif., 12.6 percent
  14. Cincinnati, Ohio, 12.5 percent
  15. Providence, R.I., 12.4 percent

For what it's worth, bankrupt Detroit is No. 61 on the list, with pension obligations that are only 7.1 percent of its total revenue. As Munnell says, "Pensions are an expense, but you can't use pensions to explain all problems."

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29 Comments
Ray
November 12, 2013 at 10:50 am

True, the pensions themselves are not the villains. But you either need to fund them, or do away with them (and convert to 401K type, probably along with higher salaries). Instead, our politicians stick their heads in the sand.

Ali
November 11, 2013 at 3:44 pm

I taught in a public school district in Pennsylvania for 37 years. Teachers contribute a mandated percentage of their income to the pension fund. We have no choice, can't opt out. The state and school districts also make contributions to the fund. A teacher's pension is based on the number of years worked and the average of your 3 highest years of salary. That is then multiplied by 2.50%. The multiplier had been 2% for years. The state legislature raised their multiplier from 2.50% to 3%. The unions fought to get our multiplier raised too. The state finally agreed when the unions agreed to the state instituting a test for all teachers. In fact my district was one of those selected to take the test and set the standards. The test never happened but we did get the new multiplyer. When the stock market was doing well and everyone was making money on the interest the governor decided the state didn't have to pay it's full share to the pension fund and told the school disticts they could also opt out, whcih most did. For 3 years the only ones paying what was mandated were the employees. Then the stock market crashed. The public employees pension fund was already hurting because of the underfunding. The crash made it worse. State law says that deficit has to be made up which means state and property taxes will have to go up. The state and school districts keep telling the public it's the fault of the public employees and their unions. They neglect to tell them that the employees not only pay into their pensions but that for 3 years they paid what was due while the other parties involved underfunded the pension fund.

H. Wolfe III
November 11, 2013 at 12:13 am

Thanks for printing the truth about pensions. I just retired from the City of Detroit and my pension will be a whopping $19,000 a year, hardly something to brag about, no less make ends meet off of. The Governor of this state and EM should be ashamed of themselves for trying to attack the workers pensions.

Paul Comitz
November 11, 2013 at 12:02 am

While there are plenty of small public pensions, there are also plenty of large public pensions. I work with retired FAA employees. They all receive $90K to $100K plus medical and other benefits. The folks I work with are not exceptions and the situation is not limited to the FAA. Most of these folks are working their second and third jobs because they were able to retire many, many (> 10) years before most private workers. This situation is very common.

GB
November 10, 2013 at 10:37 pm

What I am trying to understand is that for those of you who are complaining about public pensions, why haven't you, yourselves, become government employees? It's all a choice as to what you chose as a career. Stop attempting to make the public sector employee appear as the villain.

This is what I suggest, go down to your local government agency, apply for a government job and shut up all the whining.

Mike
November 10, 2013 at 9:47 pm

Ralph, you poor thing. My heart bleeds for you. Some people just don't get it.

Steve
November 10, 2013 at 6:54 pm

Good research would have compared for private companies as well. For example: average fortune 500 companies spend __ % of their revenue on retirees pensions. I loook forward to you doing the comparison. If average large companies spend 10-20% of their revenue on pensions then we have one result. If average large companies spend only spend 1-3% on pensions, then we have a different conclusion.

Bob Wilson
November 10, 2013 at 5:44 pm

A "DROP" is the initials for DIRECT RETIREMENT OPTION PLAN. It goes something like this in South Florida. Once a Policeman or Fireman reaches retirement based on years served,(usually 20 - 25 years of service regardless of age) they have the option to retire and start collecting their pension immediately OR to continue to work for up to eight more years. If they elect to continue working past retirement eligibility, they now continue to draw a salary while working, but their retirement check is deposited in a separate fund. The pension goes temporarily uncollected by them and accumulates over the extra years they work. The pension that is funded while waiting for retirement also earns 8% interest compounded. The pension amount is based on paying 75% of the average salary for the last three years of employment - including overtime. Many policemen and firemen in South Florida nearing the end of their careers earn in excess of $100,000 per year with overtime. For each year worked after 20 years, the pension increases 3% up to 90% of the averaged last 3 years salary. So if a Policeman or fireman is averaging $100,000 per year for last 3 years, their retirement pension could be up to $90,000 per year for life. Once retired, the entire DROP amount is payed in a lump sum to the employee as he\she starts to collect their monthly pension regardless of age. So if an officer was getting a $70,000 pension but decided to enter the DROP program for eight years - they would have in excess of a $560,000 check waiting for them ($70,000 x 8 years plus 8% compounded interest) plus a $70,000 lifetime pension. Many Policemen and firemen while drawing a pension and getting their DROP check, then get similar jobs across town in another city, draw another salary and after five years are eligible for another partial pension.

Ralph
November 10, 2013 at 5:40 pm

In the 1960's and early 70's I spent nearly 5 years in the military. Nearly 2 years of it in Vietnam. The government made sure that they got their share of taxes and social security. When I got out, I moved from job to job for a few years always paying my taxes and social security. In the early 80's I became a Police Officer and put 22 years in service to my community. We were required to put 6% into our pension fund, but didn't have to pay into social security from our Police pay. To be able to collect SS you had to work and pay into SS from other occupations.
Every year I received my SS statement in the mail like everyone else, telling me what I was eligible for, based on what I had paid in over the years.
In my city the union tried to negotiate for a "Drop" program, but after several attempts it failed. The majority of departments never were awarded a "DROP" program to my knowledge. Our pension is 50% of salary in the last year on active duty. And we don't make anything close to $80,000.
Then to be kicked in the teeth, even though Social Security told me I was eligible for $XXXX.00 dollars monthly at retirement, when I applied at age 62, they took nearly 50% from me as a penalty for being a public safety employee. They said that if I collected both a pension and SS (both of which I paid into) I would be double dipping. So don't try to tell me about excessive public pension plans.

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