Saturday, January 12, 2013

Social Security for us, Pensions for them

The maximum Social Security benefit for someone retiring today at age 66 is about $2500 per month or $30000 per year. The Social Security benefit formula is based on a worker’s average pay over 30 years. There is also a cap on Social Security benefits. Even if someone earns over $100000 per year, his or her Social Security benefit can only be based on the first $100000 of earnings. In other words, if someone makes $200000 per year, only the first $100000 will count in the computation.

Using a 30-year average benefit formula, and putting a cap on benefits were sensible, practical features that have been part of Social Security from the beginning. It was always expected that people would have to supplement their Social Security retirement benefits with their own personal savings. To assist in saving for retirement Congress over the years has allowed workers to utilize a variety of tax-sheltered retirement plans like 401ks and IRAs.

It is shocking to compare the system that our elected representatives have created for us to the one they have created for themselves. Members of Congress now participate in social Security just like the rest of us. However, they also participate in FERS (Federal Employees Retirement System). In addition to Social Security they only have to work for 5 years to be eligible for another pension. Here's how it works.

Rosa De Lauro
Member of Congress
If they serve in Congress or another branch of government for 20 years, this additional benefit will be based on the average of their highest 3 years salary, not the highest 30 years. This pension benefit can be as high as 80% of the average of their 3- year average. Ordinary members of Congress now make about $175000 per year. For example, if a member of Congress like Connecticut's Rosa De Lauro decided to retire with only 20 years of service she would receive 34% of pay or about $60000 per year in addition to her maximum Social Security benefit. For this extra pension she contributes about 1.5% of salary. What a bargain!

Members of Congress, however, seem like pikers compared to many state and municipal employees. State employees in Connecticut can retire as early as age 60 on 75% of the average of their highest three years pay. In California many municipal employees can retire as early as age 50 on 80 to 90% of the average of their last two or three years pay.

Just recently it was disclosed that in Fairfield, Connecticut firemen can retire on up to 80% of their final salary. For some firemen this was not enough and the Chief obligingly promoted them into a higher paying position just days before their retirement. In some cases this meant a monthly pension increase of over $600. That amounts to $7200 per year for life. It would take $180000 earning 4% interest to provide an annual income of $7200 per year.

The saddest or most comical part of the Fairfield incident was the admission by the Fairfield First Selectman that he was shocked to discover that the firefighter’s contract allowed such a practice. Where has he been? ###

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