Saturday, December 31, 2011

California Pension Gold Rush

San Francisco’s police chief retired recently at age 53 after 30 years of service on a pension of $239,000 per year. San Francisco allows its employees to retire on 90% of their final average pay after 30 years of service. Let’s just try to calculate the value or cost of a pension of $239,000 per year. A pension actuary would use a present value calculation but to keep it simple, it would take about $6,000,000 earning 4% interest to provide $240,000 of income per year.

The chief is only the tip of the iceberg in San Francisco where 146 retired city workers and their survivors are knocking back $100,000 or more a year in pension money. If those 146 people receive only $100,000 per year, that’s a minimum of $14,600,000 a year in pension benefits. At 4% interest it would take $365 million to provide $14,600,000 per year.

CalPERs, the California pension system has over 4800 former employees with pensions over $100,000 per year. The former city manager of the town of Vernon receives a pension of $499,000 per year. Is it any wonder that California is on the verge of bankruptcy? None of the characters that Arnold Schwarzenegger portrayed in the movies would have had the nerve to go before Congress and ask for a bail-out while at the same time doing nothing to reform the most generous pension system in the whole country. The only other alternative proposed by his successor as Governor is to make drastic cuts in needed state services or increase taxation.

It is true that government employees are required to contribute to their defined benefit plans during their working years. However, the rate of contribution will never fund their generous retirement plans. If over her 30-year career the San Francisco police chief had contributed $15,000 per year into a 401k type plan, which managed to earn 5% each year, she would have accumulated a little over $1,000,000 in her retirement account. Using 5% interest the account would have provided an income of $50,000 per year. It is obvious that her retirement plan is almost five times better with absolutely no risk!

A call for pension reform does not imply criticism of government employees and their work. Like the rest of us most of them work hard at their jobs and deserve to be financially secure in retirement. Nevertheless, their defined benefit pension plans are dinosaurs that are crushing the rest of us under foot. They even prevent cities and states like California from hiring needed teachers, police, firefighters, and medical and social workers.

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