A realistic way to gauge the fairness and financial sustainability of retirement benefits for government workers is to compare how much per year in pensions we will be paying our retired population of government workers compared to how much per year we will be paying in social security to our retired population of private sector workers. Using California as an example, here’s where such an analysis takes us.
Pensions and social security are both tied to how much workers earn prior to retirement. The average California state or local government worker earns $68,500 per year, based on data from U.S. Census Bureau data which can be found on the following tables “U.S. Census Bureau 2008 Public Employment Data Local Governments California,” and “U.S. Census Bureau 2008 Public Employment Data State Government California.” The average California private sector worker earns $46,500 per year, based on data from the U.S. Bureau of Labor Statistics “May 2009 California Occupational Employment and Wage Estimates.” The average social security benefit for an average wage earner can be found on the “U.S. Social Security Estimated Retirement Payments Chart.” It shows that a person earning $46,500 per year can expect to receive a social security benefit of about $15,000 per year starting at age 66.
Retirement pension benefits for state and local non-safety public employees in California typically range between 2.0% and 2.5% times years worked, times their final salary. Based on this formula, people employed by the University of California, for example, as can be seen on the “University Retirement Plan” (ref. page 13), will receive between 60% (30 years, age 55) and 75% (30 years, age 60) of the average of their final three years salary in retirement. For public safety employees, who comprise approximately 15% of the state and local public sector workforce in California, pension benefits typically are calculated based on 3.0%, times years worked, times their final salary. Overall, it is typical for California’s state and local government workers currently retiring after 30 years to receive about two-thirds of their final salary in pension benefits, or $45,600 per year.
To calculate the cost to Californians of paying government workers, on average, a pension that is literally triple what the average private sector worker collects from social security, one must also take into account the differing projections of worker to retiree ratios. The ratio of government workers to government retirees is on-track to be 1-1, i.e., one worker for each retiree, whereas the ratio of active private sector workers to retired social security recipients is unlikely to ever dip below 2-1. This is because government workers typically work from ages 25 to 55, then retire for 30 years, and private sector workers typically work from ages 25 to 65, then retire for 20 years. An examination of projected age distributions in America for 2030, as documented on the U.S. Census Bureau’s International Database, indicates the United States is destined to have an even streamed age distribution, i.e., about 20 million citizens in each five year age group, which makes these calculations much easier.
Notwithstanding investment returns, if there is only one active government worker – working 30 years – for every retired government worker – retired for 30 years, and if the average government pensioner receives a pension equivalent to two-thirds of what they made when they worked, then funding government worker pensions would require each government worker to contribute an amount equal to 66% of their salary towards supporting the retirees. By contrast, if at least two private sector workers – who work for 40 years and are retired for half that time – are employed for each one who is retired, and if the average private sector retiree receives a social security benefit equal to one-third of what they made when they worked, then adequately funding social security would require each private sector worker to contribute an amount equal to only 16% of their salary towards supporting the retirees. This reasoning holds enormous implications when assessing the relative long-term viability of government worker pensions vs. social security.
So how much will California’s taxpayers be spending, in aggregate, to make pension payments to their retired government workers, compared to how much they will spend to make social security payments to their private sector retirees?
To make this projection, multiply the average amount of the government worker pensions by the estimated number of retired government workers, and compare that to the average amount of the social security benefit multiplied by the estimated number of retired private sector workers. To estimate California’s projected population of retired government workers, simply use the same number as their working population, 2.4 million, since on average they work 30 years and are retired 30 years. To estimate California’s projected population of retired private sector workers, similarly, just take the population of active private sector workers, 12.2, and divide by two, since on average they work 40 years and are retired 20 years. Data for these working populations can be found from the California Employment Development Dept., Labor Market Trends 2009.
Using these assumptions, the projected number of retired social security recipients in California is 6.1 million, and the amount they will collect in aggregate in social security is $95 billion per year. The the projected number of retired government workers in California is 2.4 million, and the amount they will collect in aggregate in pensions is $110 billion per year. This is an astonishing projection. It indicates that the government will be spending more, in total dollars per year, to pay pensions to retired government workers, than it will be spending, in total dollars per year, to provide social security to retired private sector workers who are nearly three times as numerous. These facts speak for themselves. It is left to each voter and policymaker to determine for themselves whether or not this disparity in retirement security between government workers and private sector workers is either fair or financially sustainable.
Edward Ring is a contributing editor and senior fellow with the California Policy Center, which he co-founded in 2013 and served as its first president. He is also a senior fellow with the Center for American Greatness, and a regular contributor to the California Globe. His work has appeared in the Los Angeles Times, the Wall Street Journal, the Economist, Forbes, and other media outlets.
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