The San Diego Union Tribune ran a report on June 17th entitled “Escondido firefighters do contribute to pensions.” Apparently this report was to correct an error from a previous article in which the Tribune stated that Escondido’s firefighters did not make any contribution to their pension. In reality the firefighters contribute to their pension fund an amount, in the form of payroll withholding, equivalent to 9% of their salary.
While it is commendable that Escondido’s firefighters do pay something towards their pensions, considering how many safety employees in California still pay nothing, it is important to place this 9% contribution within the perspective of how much it really costs to fund a “3 at 50″ pension.
The following table depicts how much, in terms of percent of salary, an employee will need to have contributed into their pension fund in order to maintain solvency based on various rates of return for the fund.
This table uses after inflation numbers, which makes the returns appear small. In reality, CalPERS, CalSTRS, and most other pension funds, project a long-term rate of inflation of 3.0%. This means that the nearly best case scenarios here, 7.5% before inflation (showing as 4.5% after inflation on the table), are representative of the current official long-term projections used by most pension funds. Based on the official rates of projected returns for pension fund investments, a 30 year veteran, retiring on a “3.0% at 50″ pension, will collect 90% of their salary in retirement, and they will need to contribute 32.5% of their pay into their pension fund every year they work. On that basis, 9% is less than one-third what will be necessary to fund their retirement pension. But what if the pension funds return less than 4.5% (7.5% before inflation) per year?
As can be seen, for every 1.0% the real rate of return drops, the required contribution increases by over 10%. That is, if CalPERS can only deliver a 6.5% return (3.5% after inflation), the contribution goes up from 32.5% of salary to 43.4% of salary. If CalPERS rate of return goes down to a 5.5% return (2.5% after inflation), the contribution goes up from 32.5% of salary to 57.9% of salary.
Nobody seriously questions the fact that police and firefighters deserve to be paid a premium for the work they do. But how much of a premium is appropriate? A self-employed independent contractor has to pay the employer and employee share of social security. That means they have to pay 12.5% of every dime they make into the social security fund. And if they are fortunate enough to earn, at the end of their careers, what the average veteran police officer or firefighter makes – let’s lowball that at $100K – they will get a social security benefit, at most, of $30K per year at age 68. This equates to a pension formula of roughly “0.75% at 68″ vs. “3.0% at 50.”
Public sector workers, all of them, should consider these apples-to-apples comparisons to the taxpayers in the private sector who support them, when they suggest that 9% is an appropriate or commendable amount for them to be contributing to their pension funds. They should be prepared to explain why they aren’t contributing at least 50% of the cost for their pensions, with that contribution going up whenever projected rates of return for their pension funds go down.
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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