SUBSCRIBEPension Bomb Boomlet
Tax-funded contributions to the New York State Employee Retirement System (ERS) will have to jump by 61 percent between 2010 and 2011, state Comptroller Thomas DiNapoli announced today. Contributions for members of the Police and Fire Retirement System (PFRS)–already higher to begin with–will rise by 21 percent during the same period. Extrapolating from currently available payroll information, these increases will translate into added costs of at least $400 million for the state and roughly $750 million for local governments and public authorities.
But it won’t stop there. To make up for the system’s investment losses in 2007-08, pension contribution rates will continue rising well into the next decade. For example, under one scenario modeled by DiNapoli’s office, contribution rates for the ERS and PFRS will rise from their 2011 levels of 11.9 percent and 18.2 percent of payroll, respectively, to 30.3 percent and 41.1 percent by 2015. The increases in the first three years of the period are consistent with the forecast in the latest financial plan update from the Division of the Budget (DOB).
That scenario–developed, the comptroller’s staff emphasizes, solely for illustrative purposes–assumes that the pension fund’s investment gains will roughly duplicate its actual experience during the 20 years following the 1987 market crash, starting with an average annual return of 10 percent over the next five years. This is optimistic, to say the least.
New York’s other pension time bomb is ticking over at the New York State Teachers Retirement System (NYSTRS). The teachers’ fund–which has a separate board of trustees and is not overseen by DiNapoli–is roughly two-thirds the size of the state system. In most New York communities outside New York City, teacher pension costs alone have at least as great an impact on local property taxes as pension contributions for all other local employees combined.
The NYSTRS runs on a different fiscal year than the state pension system, and won’t announce a preliminary 2010-11 pension contribution rate until November. Meanwhile, it has warned school districts to expect a “significant increase” next year. Since the TRS is affected by the same market trends as DiNapoli’s system, its costs can also be expected to roughly triple over the next five years. Including schools, the combined annual pension cost increase for New York state and local taxpayers (excluding New York City) could increase $9 billion by 2015. Or maybe even more. Or maybe somewhat less. No one can say for sure.
So, what can be done about all this? DiNapoli has proposed capping pension costs by allowing employers to “amortize” a portion of their added annual contribution for up to 10 years at a time. However, as explained here (and here), amortization would simply shove costs into the future by allowing employers to borrow from the pension fund—and at an interest rate below the fund’s 8 percent target rate of return, to boot.
The governor’s proposal to scale back pension benefits by creating a fifth “tier” of benefits for newly hired workers is a small step in the right direction, but it falls well short of the more fundamental reform the system needs, as explained here. For newly ERS members, it would reduce long-term pension contribution costs by 19 percent, according to DiNapoli; reducing, for example, a billed rate of 30 percent to 24 percent, which would still be more than triple the projected 2010 level. Even if Tier 5 is enacted, the traditional defined-benefit pension system would remain a source of extraordinary financial risk for New York taxpayers, who must ultimately deliver constitutionally guaranteed future benefits to current employees no matter how poorly the pension fund investments perform.
Keep in mind, also, that the accounting standards for public pensions are fundamentally misleading–allowing all state and local retirement systems (not just New York’s) to cook their books. The Government Accounting Standards Board (GASB) heard testimony on the issue earlier this week and is slowly moving toward a tweak of its reporting rules to improve transparency.
This much is certain: if New York State’s pension funds were subject to the same accounting rules as a private corporation, their pension shortfalls would be significantly larger than they appear under current rules. New York City’s actuary, Robert North, has already acknowledged as much for the systems that rely on his calculations.
The chief actuary of the giant California Employee Retirement System recently acknowledged that California’s pension costs have risen to “unsustainable” levels. The same is true of the Empire State–and nothing yet proposed in Albany would change the situation.
Meanwhile in Ohio:
“A road map for long-term financial stability was unanimously approved yesterday by the State Teachers Retirement System’s board of directors, but several steps must be taken before it can be put into place.
The plan comes with a cost: It would increase the sum current teachers and their employers pay into the pension fund, and it would reduce some benefits for retirees.”
The cost of living adjustment would be cut back — including for current retirees. The employee contribution would rise from the current 10 percent to 12.5 percent, and employer contributions starting in 2016 from 14 percent to 16.5 percent, including for current workers. And “the plan would push back the age at which members can retire with full benefits and alter the way in which a teacher’s final average salary is calculated.”
http://www.columbusdispatch.com/live/content/local_news/stories/2009/09/02/teachers_pension_redo_.ART_ART_09-02-09_A1_PNEUNJ6.html?sid=101
I guess that in Ohio, they realize that there will be no school system if all sacrifices are made by future teachers who don’t have to teach there, and if taxes future generations have to pay are too high, and services too bad, there will be no one to pay for the pension. Much less enlightened self interest here, and much more entitlement relative to the people who don’t matter, and younger generations.
How much to teachers hired more than two years ago with more than ten years’ seniority contribute to the pensions in New York again? I believe it is zero.
Comment by [Blocked by CFC] Larry Littlefield — September 3, 2009 @ 7:08 pm
How come there’s no mention of the 5 years when government paid 0 into the pension system or the 10 years they paid under 5%. The truth us that by attacking and hopefully, on your part, eliminating the State’s defined pension plan you will make it easier for private companies to further reduce their pensions.
Comment by don — September 4, 2009 @ 8:29 am
Can anyone tell me why teachers and other public union employees can retire in middle-age, like under 55, with a full lifetime pension and benefits? Not too many of us in the private sector can retire at 55, meaning taxpayers in their 60s and 70s are working to pay the benefits and pensions of government retirees 10 or 20 years their junior. Its not a fair system and another reason NYS is going bankrupt.
Comment by confused taxpayer — September 4, 2009 @ 10:04 am
As usual EJ, you are right on cue with the public employee bashing.
The average cost to the taxpayers of the LRS over the years has been about 8%. This is not much more than the average 401(k) match offered by private employers. The only difference here - the defined benefit pension is much more secure for the employee, while the defined contribution plans are more secure for the employers.
For all of your lamenting about public employees, you always forget these small details like facts, don’t you?
You tend to forget (or ignore) that public employees salaries are far less than those of their private industry counterparts. And the more education is required for the job, the greater that disparity gets.
Being able to offer these types of pensions to new college graduates is about the only real recruiting tool that government has left. With lower salaries and no bonuses at all, if you were to remove or even change this benefit, there would be NO motivation for any recent college graduate to even consider working in the public sector.
Given the small amount extra (over the long term) it costs for government employers to provide pensions as opposed to what it costs an employer to do a 401(k) match, government for the most part still pays LESS for it’s employees in total than what many private industry firms do when adding up all the salaries and benefits.
The funny thing is, if the politicians leading this state and this country had done their jobs correctly and not allowed the current financial meltdown to happen, the cost to government employers for the LRS would be down around 1 - 2%, which is far less than what most private employers pay for their 401(k) matches.
You have already twisted pension and salary facts numerous times, or even just used made up numbers. To illustrate, here are your some of your previous fake numbers and facts:
$50k a year is the average pension that pensioners receive? Not according to what OSC says. In 2008 the average pension from the LRS was $24k.
The average state worker has a salary of $50k a year and cost $70k when benefits are added in? How does that math work on that one if the average pension is $24k? At 75% of salary, that would mean the average public employee has a salary of $32k. And as far as that $70k figure, I highly doubt our health insurance and pension costs add up to more than our salaries…
Anyone who bothers to do any research or put any thought into what you have to say EJ will see right through your propaganda.
You don’t run a fiscal watchdog group. If you did, you’d realize that the issue with government spending in this state has nothing to do with the employees or the costs to keep them employed. It has to do with the fiscal irresponsibility of those that are elected and decide how to spend our tax dollars.
What you run is an anti-union and anti-government employer propaganda machine set up to push the anti-union and anti-government employee agenda of the far right, and the errand boy of the Corporate NY that whines (falsely) about how high their taxes are.
Government is just about the last vestige in this state and this country for a unionized workforce. Far too many in private industry gave up their unions long ago, and the middle class has suffered ever since. Just as before the unionization movement that was nothing but the poor and the rich, the union busting tactics of Corporate America has begun pushing back to that model, shrinking the middle class a little bit more every year.
Keep up with the good work EJ. Your fact checking skills are legend!
Comment by maverick100 — September 4, 2009 @ 12:54 pm
This mess is EXACTLY what I and other fiscally minded persons have been warning about. Only now, when it is a disaster might some listen.
The simple fact is that these incredibly generous pensions are unaffordable, not sustainable and crippling taxpayers. I most strongly suggest that we collectively tell them in our most direct and loudest voice \NO!!\. No, we will NOT be forced to replenish the \stupid-high\ pensions gouged from taxpayers by unions and their all but bought & paid for legislators. Here’s a clue: Your pension is YOUR problem. Leave us out of it. We have our own problems and retirement to worry about. Funding your comfy retirement in Florida at 40-60 years old, while the rest of work till 70 is not in the equation.
Sorry to be so direct & blunt, but this mess has been long in the making. We can’t afford your outrageous contracts & union largesse. You want it? YOU pay for it. We’re done.
Too bad even this won’t work. Bankruptcy, here we come!
Comment by Metaphysical — September 4, 2009 @ 4:17 pm
Metaphysical,
You sound exactly like your “fearless leader” here. Nothing to say but garbage with no facts to back yourself up.
The bottom line is the state is bankrupt because of the people that spend the money. And that would be the elected politicians.
Your argument is like saying the parents are broke because of the cost of raising their kids, even though the parents have sufficient income to pay for the kids and an accountant would tell them they are ACTUALLY broke because they own 3 houses, 5 cars, and a condo in Florida and have 10 maxed out credit cards because they want to keep up with the Jones.
Comment by maverick100 — September 4, 2009 @ 7:34 pm
The system is unsustainable,and what is going to happen is there will be true violence between the middle class. The Government created a system with to many loopholes,and the war between the middle class will be like nothing we have ever seen. Everyone wants there entitlements. The truth is the public sector wants what they feel they deserve. The private sector feels that they cant be getting taxed more and more to cover these deficits. Then the only thing that will be attainable will be like a said before, A war between the middle class . Unfortunately this will be the start of the beginning of the likes I would rather not speculate on. Truth is nothing can be done about this and time will tell that the war of the middle class will be the straw that breaks America’s back .
Comment by Frankie — September 4, 2009 @ 10:46 pm
Tell me, “Maverick”, exactly what “fearless leader do you refer to? I have never before posted on this site, nor was I all that familiar with it. Came across it as a link.
You accuse me of being devoid of facts, but perhaps a good look in the mirror is in your future.
Fact: NY taxes are among the highest. Fact: They frequently rise above inflation. Fact: Public pay, pensions benefits have largely surpassed the private sector. Fact: NY taxpayers are again being reamed to fund others’ benefits.
Now, lets look at what you spout off: You go off on some non sequitur about parents spending on 3 houses and 5 cars. Sound to me ALOT like the NYS politicians giving the damned unions everything they want & then sticking US with the bill. My desire to be fiscally responsible is what drives me to protest these unaffordable & foolishly high pensions benefits. Give me ONE good reason why I should yet again see another butt reaming tax hike so the pampered unions can enjoy retirement as early as 40 years of age (police)? You can’t. I have my own issues to worry about, like saving for my own retirement, college & more. The state & its unions have enough of my money.
Let’s see what you have in response to this. I’m guessing “nothing”. Your turn.
Comment by Metaphysical — September 4, 2009 @ 11:56 pm
Hey mavarick100 … sounds like your one of the Civil Servants riding this gravy train.
Metaphysical is right, but doing what he says is needed will certainly take a fight. But, (as a TAXPAYER), its either fight, or let you guys keep sucking money out of our pockets forever.
Comment by Bull — September 5, 2009 @ 12:55 am
You are devoid of facts.
You and your “Fact:” frenzy really only is just spouting off your opinion. Where are you getting your information from? You stating something is a “fact” doesn’t make it so. I reference not only the actual fact, but where the information comes from smart guy.
And I can’t help it if you aren’t swift enough to understand the comparison I made above.
Basically, you are just posting all emotionally because you are fed up with high taxes. This is understandable. But here’s the real scoop. Even if the politicians in Albany were to push through a completely employee funded 401(k) style system, are you really that naive to think that the geniuses at the Capitol wouldn’t find somewhere else to spend the money they saved?
Check out the reports from OSC. Salaries and benefits account for 17% of the budget. Do you ever ask where the other 83% is going, or just whine about government worker salaries all the time?
As far as the fact the those is the PFRS can retire after 20 years of working an inherently dangerous job, go tell the guys in the NYPD or the FDNY that had to deal with the attacks on 9/11 they don’t deserve that. And please, do it in front of a crowd of people right near Ground Zero. See what happens next.
You want reality on why your taxes are so high? Start with the myth that New York businesses are “crushed” with taxes. Most New York businesses don’t pay anywhere near their fair share. Sure, they whine and quote figures, but what they don’t say is the majority of the “taxes” they paid were sales and withholding tax - money that they collected from others and didn’t belong to them in the first place. What does that leave them paying? Well, if they have $250k in revenue or less, they pay $75 a YEAR in franchise taxes. That’s it. They don’t go up much more. Try looking at the instructions for a Franchise tax return and check out the tax tables for the Fixed Dollar Minimum tax, since that’s what most businesses pay. You might be surprised at how little they actually pay. Even those businesses with $999,999 in revenue only pay $500 when using the FDMT!
Taxes are also high in New York because the idiots in Albany don’t know how to properly budget or spend wisely. $30,000 for a carpet for the Governor’s mansion? C’mon. Leases for office space costing millions a year when the offices are vacant? Upstate Senators and Assemblymen “needing” offices downstate, again costing millions? Giving money to build the new Yankee Stadium? Need I go on here?
But keep on trucking with the argument that the state is bankrupt because of it’s workforce. The cost of the workforce is the LEAST of the states problems.
Comment by maverick100 — September 5, 2009 @ 1:21 am
You are mixing issues. The issue HERE in THIS thread is pension costs. It is you, not I, who have delved into other areas. Your analogy is what it is and has little bearing on the subject at issue: pension costs. Now, if the debate were originally focused on NYS spending as a whole then you’d be dead on right. Moreover, this informal site is not an appropriate vehicle for citations and more. One does not usually get into detailed & footnoted debates in an internet bulletin board. Well, at least I don’t. Who has the time?
I cannot disagree that NYS spending is beyond foolish as the examples you cite readily indicate. That too many, me included, have fought. Too bad none of us have been successful. I am not as well versed in corporate taxes, but am aware that NY has a generally inhospitable business climate. I am not sure what your “Franchise” ax has to do with overall corporate tax rates. Obviously, collected sales tax is not a factor. My issue is primarily property & school taxes, which are pretty much out of control. I no longer care so much about the reasons as demand relief. Cut them by 40% or more & let the chips fall where they may. Welfare has to go? Oh well. NY’s ability to be an ever more oppressive nanny state curtailed? Wonderful. Fewer police harassing motorists with roving, revenue driven speed traps? Good! I wouldn’t mind NY becoming a bit more Libertarian & less Schumer-esque nightmare.
You never did answer me– why should my taxes go up to fund your retirement? Why is this my problem? And no, I don’t begrudge FDNY or NYPD persons injured or worse in 9/11 their due. I do not, however, agree that retiring after only 20 years is appropriate or justified. We just cannot afford to pay people “retiring” at 40 or so for life. I’d allow them the option to stop working, but cannot see collecting until 60 or so. It is simple economics. Can’t see paying a person 60 years in total who has only worked 20.
True, the state’s workforce is not the sole issue, but it appears to be grossly more than we need and still manages to get better total compensation on average than the private sector. It is nonetheless a large issue and should not be ignored simply because it is not the sole reason for NY’s decline. Wasteful welfare and other spending is a separate issue and does not justify out of line with the rest of us compensation. Even if we fixed NY’s fatal deficiencies would that excuse or otherwise justify outrageous public union demands? Why do the unions think that bad times should affect everyone but them? Have you actually listened to the nonsense spewed by the NYSUT? That bunch has done more to harm education than anyone else. These unions, the Triborough amendment & mandatory arbitration all need to GO.
Me? I largely blame the downstate legislators & their preoccupation w/ NYC’s useless and non productive millions. They’re seemingly always playing to the unions, the “poor”, the welfare class or worse. Just look at the MTA fiasco. NY is a simmering cesspool and getting worse. I predict some rather strained times ahead. Maybe we’ll get lucky & see a little taxpayers’ revolution. A little revolution now and then is a good thing, yes?
Comment by Metaphysical — September 5, 2009 @ 1:59 am
Mixing issues? I call shenanigans. YOUR issues is that you don’t want your taxes to go up. I’m illustrating to you that government employees are not the problem, and that there is plenty of waste to go around.
Your taxes DO NOT need to go up to provide for the current pension system provided that the morons in Albany start making appropriate decisions about how and where money is spent, and at the same time the morons on Wall Street get the markets going in the right direction again.
Yes, there is a temporary spike in the amount that local governments must contribute due to the market. Before 1989 or so, rates were a little higher than even today for a time. However, were you complaining from 1989 through just two years ago or so when pension costs were extremely low? There were a few years at or slightly below 1%. When that was the case, did your local politicians reduce your property tax rates? Of course not! They just found somewhere else to spend the money.
Believe or disbelieve what you want, the fact of the matter is government employees make a trade off: Lower wages in return for job security and that pension. If you want to put the state and local governments into a position where no one with any amount of education wants to work for them, changing the pension plan is the way to do this.
You don’t acknowledge that you blame GOVERNMENT EMPLOYEES for the fiscally irresponsible actions of ELECTED POLITICIANS. The issue with the rate you pay for those pensions is controlled by politicians. Why take your anger out on people that AREN’T responsible for your woes?
To clarify the difference between Franchise Tax and Corporation Tax, there is none. They are one and the same. The common name is Corporation Tax, but in the tax law, it is referred to as Franchise Tax.
Stating the unions need to go and the laws relating to the government workforce need to go shows you have no clue why these things exist in the first place. I can tell you from first hand experience that the State would not follow it’s OWN general workforce protection laws if it wasn’t for those unions. As it is most state managers routinely disregard them, because it’s not like the State is going to prosecute itself! Get rid of those laws, and when the unions don’t get what they want, be prepared for strikes. As far as getting rid of the unions themselves, you fail to remember that the right to organize is both a FEDERAL right and organized labor was what gave birth to the middle class in the first place.
You complain that the states workforce is too large? HA! Typical reaction of a pissed off taxpayer. The reality of things is that per capita, New York is ranked 48th LOWEST out of the 50 states for the number of government employees. That information is available on the US Census Departments site if you do a little digging, but no one ever bothers to do that. Sure, the RAW number is going to be high - we are one of the most populous states in the union. But where it counts, where you can compare New York to a state the size of Vermont and have an accurate gauge, would be per capita.
You are entitled to your opinion about what those in the PFRS deserve for protecting you. Personally, if they are going to run into a burning building to drag me out - “Thanks for your service!”. Do you complain about those in the military retiring earlier than others too? You forget, I am a taxpayer too. If my money has to be spent on something, I’d prefer to spend it on something I believe in.
I completely agree with you about the MTA bailout. The MTA bailout is a joke. Here’s something that already brings in billions a year between the cost to it’s riders and the MTA surcharge for any business in the MTA district, yet they still have no money? Mismanagement at it’s finest. Luckily, for those upstate, this is a non-issue as the bailout is only affecting those in the MTA district. This is the one time I feel the affected business have a LEGITIMATE gripe.
Your venom is justified. I feel the exact same way you do. But the facts don’t justify WHO you are spewing it at. It’s not the members of the retirement system causing your taxes to go up. I’m my community, they are talking about spending $2 million more a year. Given what our budget is, the actual increase to each taxpayer is going to be minuscule. Do I think the OSC could do a better job of trying to get rid of the occasional spikes to make it easier to plan for? Sure. How about setting a fixed rate based on what the average contribution has been since the inception of the plan?
Comment by maverick100 — September 5, 2009 @ 9:25 am
Well…… You are obviously 2 things. A union member or sympathizer and right on NY’s waste. I also surmise you are unlike me in that I am but an average NY taxpayer. I suspect you are something more, i.e. a union lobbyist or the like, who comes here to rebut the more financially conservative views of this site.
However, we must agree to disagree on public employee unions. Waste/fraud on the legislator’s side doesn’t justify unions’ continued refusal to live in the same reality as the rest of us. Everyone but them can be affected by changing economic times and conditions. That is just not fair. My personal taxes have doubled in the last 10 years, largely due to employee costs & state mandates. Every year it is the same excuses: Contracts, health insurance and pensions. Whatever the reason, we cannot afford it. If you joining us in the real world keeps our taxes down & brings you to our side of the fight better still. Even if we assume that you are right that the reason for your pension fund’s drop is malfeasance, a point I do not concede as I still view it as out of line with the real world & vastly excessive, such is not my problem. YOU should confront those responsible & have them make you whole. Don’t you dare raise my taxes to replenish your fund. Who shall do such for my 401k? If the union nonsense about pensions being cheaper than 401k plans were true we’d all have them. Sorry, but I just don’t see this. I no longer care so much about the underlying condition as I do the need for relief. Few of us do. The effects of these pension costs on my school taxes alone will likely total hundreds of dollars per year and rising over the next few years. The gap between what public employees get & what the rest of us have is widening to grand canyon like proportions. Why should I tolerate this, much less PAY for it? Dammit, I refuse–and so do an increasing number of people just like me. This has the unions justifiably worried. Good. Welcome to our world.
I am sufficiently versed to know that there are various laws allowing for collective bargaining. I fear, though, that they’ll be our undoing. Just look at CA to see where we’re headed. I predict a series of municipal bankruptcies as in Vallejo. In fact, I hope we do have some. Only such drastic action will slow the runaway train. Union excesses played a large part in GM’s demise. I see the same thing happening here. Yes, unions have a place & did indeed save the working man from an Upton Sinclair like disaster. But, IMO the pendulum has swung too far the other way. The unions now exert far too much control over gov’t, who increasingly lives to serve them. Want proof? Average cops earning 100K or more and able to retire at 40 at 50%. Teachers retiring at 55 or 60 on 70K or more for life. I am not blaming the custodians and ordinary people, but the NYSUT, police fire unions have gotten way out of control. We just cannot afford this, nor do we want to offer such unparalleled gold plated pensions. Add in the spiking scam, etc and we’re done. Ever see the website http://www.pensiontsunami.com ? That is where we’re headed. I don’t begrudge the military at all. What they get is nothing, however, compared to the nearly omnipotent police & fire unions. We’re becoming a police state & don’t even see it. Worse still, many seem to WANT it.
Upon reflection, it appears our primary disagreement comes from your apparent opinion that maintaining the union largesse is a question of finding more/better revenue streams and my opinion that less spending across the board is preferable, unions included. They must be disabused of their persistent belief that they are immune to the economic realities affecting the rest of us. In short, stupid spending elsewhere doesn’t excuse my paying for stupid high benefits for them. Cut it ALL. I’ve been complaining of these costs for years, yet only now do people listen. Took a disaster to get awaken them. Don’t care about event of 1989. We’re 20 years later. Economic realities have changed & so have we all–the unions included.
Increasingly, our options are limited to getting the hell out of here. I count the years and can’t wait to say goodbye to this ever more socialist, nanny-police state quagmire. Too bad many feel the same way.
Comment by Metaphysical — September 5, 2009 @ 10:29 am
Dear maverick100: Take a look at the demonstration below. Although it was written for a comparison of California Policeman vs a Private Sector worker, the conclusion is still very accurate even though NYS’s pension formula for cops is somewhat less generous than California’s. The point is that although “spending” and “funding” issues are important, there remains the overwhelming PROBLEM that Civil Servant pensions & benefits are simply TOO generous considering the fact that the vast majority of their funding is an obligation of TAXPAYERS (whether funded or not).
***************************************************
If you “do the math” ….
The total “value” of benefits at retirement is the present value of all future payments, be they pensions benefits, healthcare premium subsidies, or anything else. Some of these future cash flows are definitively known at the time of retirement (e.g., fixed monthly pensions), and others need to be estimated (e.g., healthcare premiums, the incremental value of future COLA pension increases, etc.). However, all of these future payments can be reasonably estimated (sometimes with several options such as the low, medium, and high liability estimates routinely provided by the Social Security Administration). Once all known and estimated future payments have been determined, they can be discounted to the point of retirement at an assumed interest rate and an assumed mortality rate (for those payments that cease upon death). The interest rate used in this calculation is very important, but actuaries routinely do calculations of this sort and the range of reasonable interest assumptions for this purpose is fairly narrow.
The present value of all retirement pension and benefit payments can be looked at as the answer to the question ….. How much would an insurance company charge in a single payment at the time of retirement to take on the guaranteed responsibility to make all future payments in lieu of the former employer.
If we examine two 30-year service, age 55 workers (one Private Sector & one a Policeman or Fireman) making $100,000 in base pay + $20,000 in overtime at retirement, what would these present values be?
Being somewhat versed in the subject of employee benefits I’ll describe the “likely” pensions & retirement benefits afforded each and then estimate their present values.
Let’s assume the Private Sector worker is one of the few lucky enough to still have the older traditional-style defined benefit pension plan, and does NOT contribute towards its cost (common practice in Private Sector plans). With 30 years of service and with a typical formula that takes into account wages above and below Social Security “covered compensation”, this worker would likely receive about 40% of final 3-year average pay at normal retirement age, and overtime would NOT be included in benefits-bearing compensation.
Here’s how the Present value would be calculated …
Assume $95,000 is the AVERAGE of the last 3 year’s base salary, so 40% x 95,000 = $38,000. But this would be payable only if the employee waited until his plan’s “normal retirement age”. Let’s assume that his plan’s normal retirement age is 60. Since he will start collecting his pension 5 years early, there would be an “actuarial reduction” of 4 to 6% per year (just like Social Security applies when someone starts collecting early at age 62). Let’s assume the yearly reduction is 5%. So … we now have an annual pension of $38,000 x .75 = 28,500.
Now, to convert this to a “present value” we need to apply a life annuity factor (which incorporates the interest and mortality discounts discussed earlier). For someone retiring at age 55 this “factor” would be a multiplier of about 15. So … the present value of this worker’s pension is $28,500 x 15 = $427,500.
We will also assume there are no post-retirement healthcare benefits, as such benefits are VERY rare in the Private Sector.
Now let’s calculate the present value of the Policeman’s pension & benefits.
The pension formula for the policeman is often 3% of the last year’s salary (including overtime) per year of service and with no “actuarial reduction” for collecting benefits at age 55 (unlike for the private Sector worker). So … we have ($100,000+$20,000)x.03×30 =$108,000. But, we’re not done …
The policeman’s pension includes a provision for post-retirement COLA increases (while essentially NO Private Sector plans do so). Although this may surprise the reader, the “value” of this added benefit is VERY significant. Even with a modest long-term inflation assumption of 3%/yr, the addition of a COLA benefit for life increases the value of the pension by at least 50%. Hence, the levelized annual pension (with the COLA) is now $108,000×1.5=$162,000.
Using the same annuity fact of 15 (as used in the Private Sector workup above), we have a present value of 15x$162,000=$2,430,000.
But wait, we’re still not done (2 more items to adjust for) …
First, in fairness, the policeman contributes a percentage of his pay toward his pension (unlike the Private Sector worker), and the accumulated value (at interest) of these payments at retirement should be subtracted from the above $2,430,000 for a fair comparison. For this policeman whose final total pay was $120,000, I have calculated the accumulated value at retirement date of his contributions to be roughly $400,000. Hence the present value of this officer’s pension (offset by the accumulated vale of his contributions) is $2,430,000-$400,000=$2,030,000
Second, this officer gets free or heavily subsidized retiree healthcare for himself AND his family. Since he is not eligible for Medicare until age 65, his healthcare premiums are very expensive and are expected to increase annually at 8-12%, triple the rate of regular (non-medical care) inflation. The present value of this benefit and the post Medicare age healthcare subsidy is roughly $500,000.
Hence, the present value of this officer’s pension AND retiree healthcare benefit is $2,030,000+$500,000=$2,530,000.
Now, let compare the present value for these 2 workers making the SAME pay, working for the SAME number of years, and retiring at the SAME age.
The Private Sector worker’s EMPLOYER-PROVIDED retirement benefits are worth (as a present value on the date of retirement) $427,500.
The Policeman’s TAXPAYER-PROVIDED retirement benefits are worth (as a present value on the date of retirement) $2,530,000.
The crisis associated with funding Civil Servant Pensions and benefits is NOT a revenue shortfall issue. It is CLEARLY one of EXCESSIVELY GENEROUS pensions and benefits as the above calculations demonstrate.
For 2 similarly situated workers (in pay, years of service, and retirement age) the Policeman’s package of retirement benefits costs the TAXPAYERS almost SIX TIMES what the typical Private Sector employer is willing to pay.
Clearly, if the Private Sector employer provided the same benefits to his workers that the policeman receives, his company would likely go bankrupt in short order.
These unreasonable benefits have been provided due to a political structure that rewards politicians for “giving-away-the-store” of not their own, but TAXPAYERS’ money, for personal gain. This “gain” may simply be to feed their ego, garner the union support needed to get re-elected, or perhaps worse … for current or future personal financial gain.
In any event, the current situation is without doubt unsustainable and without MAJOR REDUCTIONS to the benefits provided CURRENT (not just NEW) public employees, towns, cities, and states will be filing bankruptcy with increasing frequency.
Unfortunately, since difficult change is delayed and delayed and delayed to avoid the confrontation (with very aggressive unions), important public services will suffer tremendously until action is FINALLY taken.
I’m sure their will be Civil Servants (with vested interest in the status quo) that will say my figures are wrong. Estimates are necessary, and small variations in assumptions will change the figures to a minor degree, but the final relationship is quite accurate …. TAXPAYERS are forced (via their taxes) to pay almost SIX times as much as the Private Sector employer is willing to pay.
By-the-way … any qualified actuary can verify the reasonableness of my figures and conclusions, …. and I would welcome the actuary who offers to do so ……
Bye-the-way ……… I didn’t mention it above, but it’s worth a comment …… Civil Servants often take advantage of what’s commonly called “spiking” to unfairly boost one’s pension just before retirement. This takes many forms: large last minute promotions and/or raises, excessive/unusual overtime, cashout of sick and/or vacation days with the payout included in “compensation” for pension calculation purposes, or inclusion in “compensation” of miscellaneous “allowances” (housing, vehicle, parking, uniform, etc.).
None of this is EVER allowed in Private Sector employer-sponsored plans (employers are spending THEIR OWN money, not TAXPAYER’S, and would never be so foolish). For every $10,000 of “spiking” that works its way into the above Policeman’s “compensation”, it costs the TAXPAYERS an additional $10,000x.03×30x1.5×15=$202,500 !
Comment by Tough Love — September 5, 2009 @ 11:04 am
Wow, “toughlove”, I am impressed. I lam not as well versed in actuarial matters as you, but I find your analysis spot on & in concurrence with pretty much every other non union source I’ve come across. Only the unions argue such is sustainable, usually via questionable or outright wrong assumptions, like the “police don’t live all that long past retirement” BS. Such union nonsense played a big part in GM’s collapse.
Good to see I am not the only on this issue fighting for taxpayers. Hey, if the unions don’t like being on the same footing as the rest of us then tough. Quit or leave. Just leave my taxes and money alone. We cannot afford 100K+ traffic cops retiring at 50 and yanking in that or more plus health care for another 30-40 years.
We need a little revolt or revolution here.
Comment by Metaphysical — September 5, 2009 @ 12:31 pm
You both harp on the retirements and incomes of Police and Firemen.
Hilarity! Other than stating that for risking their lives, they deserve a better pension than the rest of the public servants out there, I haven’t really touched on their costs.
The same goes with teachers. I haven’t made any mention of the costs attributed to the TRS.
Every single figure I have quoted has to do with the cost of the LRS - to clarify, that is the common retirement fund. The PFRS is for police and firemen and is a completely seperate fund with different costs, as is the TRS for teachers. Apparently neither of you understand that the LRS is completely different than the PFRS and the TRS.
And whining about the cost of a COLA! ROFLMAO! Once the employee RETIRES, no additional money comes out of the taxpayers pockets to fund that employees pension. So if the employee gets a COLA, that doesn’t cost you one red cent. It comes from the money that the employer has already invented in the retirement system during the employees working years.
Clearly neither of you have clue 1.
Finally, read the news. GM’s collapse was caused by an inept management that wasn’t smart enough to realize that although SUV’s were profitable, people would only want to buy them while gas was cheap.
Sure, the costs for the PFRS are much higher than those that I’ve quite for the LRS. But trying to compare the two systems is ludicrous. The same goes for comparing the TRS with the LRS.
First of all, are there private policeman anywhere in the country? Where do you come up with a comparable salary and benefit package for a police job in private? That’s right, there IS no comparable job. The same goes for Firemen. You are comparing apples and oranges here.
There are certainly private teachers, and I won’t bother taking the time to research it now, but I’d bet dollars to pesos those working at a private school are compensated much better. It’s just no one wants to admit that fact.
If you don’t like the fact that cops and fireman have to work overtime, then that means you will have to hire MORE of them! What’s worse, paying a slightly more to compensate the ones that are already there, or hiring even more and then having to pay for additional health care benefits, leave benefits, etc that you wouldn’t have to pay again if an existing employee just worked some O/T.
The logic you two are using is just astoundingly insane.
Neither of you even care to acknowledge the fact that what it costs to have public employees is minuscule compared to the rest of the budget. In the end, no matter what facts are thrown at you are it’s pointed out that you are comparing apples to oranges, right wing nuts like yourselves will not be happy until every civil servant is making minimum wage with no benefits. Good luck trying to hire civil servants then.
Comment by maverick100 — September 5, 2009 @ 2:46 pm
Maverick, I could cite many different arguments, but in the end it is perhaps sufficient to say you’re a union tool. I do have one question for you that you still have yet to answer. You exempt union excesses as irrelevant given the state’s general budgetary malfeasance. Again, this is irrelevant. Two wrongs don’t make a right. Your pension costs are a direct and proximate cause of my tax increases. And, no, I don’t think police or fire deserve a better pension than the rest of us. I 100% agree that those killed/injured in the line of duty should be well cared for, but I decline to award “stupid high” pensions. Not worth it, IMO. The state’s budgetary tricks don’t excuse or exempt your entitlement mentality.
You’re obviously a union fanatic as evidenced by this “GM’s collapse was caused by an inept management”. No doubt such played a part, but union excesses are up there as well. Your refusal to acknowledge this speaks volumes. Unions are less the saviour of working people than parasites, intent on killing their host, i.e. people like ME. I decline to be a victim and am fighting back. The unions have long feared this & are now scared. Good. And, no, we don’t need all that OT. People need to be a little less reliant on Gov’t for everything. Me? I look out for my own & would only ask for help in the most dire of circumstances. I don’t want a cop on every road & don’t expect Gov’t to be my de facto nanny.
Why do you call me a “right wing nut”? Do you know ANYTHING about me or my politics? I am fiscally conservative, but socially quite middle of the road. I have no problem with civil servants getting a fair deal, but when they alone escape the economic wave hitting the rest of us & alone have better pay, pensions benefits than those paying them then you’re damned right I say “NO!!”. Dammit, I am not going to pay anymore so YOU can retire in FL while I work till I am 70. If this means I won’t be able to hire more civil servants then, again, I say GOOD! If you people were run like a real business you’d all be in chapter 7 by now.
And, no, I decline to get into the differences among the teachers’, fire, police & civil pensions. ALL are too high and ALL are cranking up my taxes. Don’t care anymore. I am paying too much & getting too little in return. If neither I nor the rest of us taxpayers have such then I decline to pay for you to have it.
We have “clue 1″ as you call it. You just don’t like it that we do.
So, here are my questions:
Do you think I should pay more in taxes to support your pension plan, even if I am already paying among the highest taxes in the US? If so, why?
What do you think should be done about the pension mess? Why should public employees get pensions the rest of us nothing?
What should we do about taxes?
Will you, as the last one here in NY, turn out the lights when the rest of us leave?
Comment by Metaphysical — September 5, 2009 @ 3:49 pm
To Mararick100……..
Some people are SO clueless, that they do not realize that they such. Clearly you fall in this category.
Comment by Tough Love — September 5, 2009 @ 4:34 pm
I still say you sound like nothing more than a pissed off taxpayer, and you have every right to be. I’m just as pissed off as everyone else. I just recognize that there are bigger fish to fry and choose to direct my efforts towards where the REAL waste is. Work on that, and your taxes end up going down. The cost of civil servants and their benefits always pisses people off. Why? Because the misconception that they are under-worked and overpaid is too prevalent. It’s easy to point the finger and say “You get this, why should you? I don’t”. It’s harder to go to your own employer and demand the same things for yourself instead.
“Union excesses” is a crock of…. Do a salary by salary comparison of a civil service job with the private industry counterpart. Even NOW, in this economy, those in private have much higher salaries. The tools are available online for you do do this. You just choose not too because your emotions tell you that civil servants MUST be overpaid, when the fact is, they make less. Do you really think an attorney working for the state full time makes the same as an attorney in private practice? How about a doctor or a nurse? How about a computer programmer? Need I really go on here? If you truly think civil servants in those jobs (and many others) make similar salaries to their private industry counterparts do you are sadly mistaken, and you could easily look that up using information on the Civil Service website and a tool like Salary.com.
That doesn’t even consider other fringe benefits those in private may get from their employers that civil servants never will, like performance bonuses, paid retreats, or even an office holiday party paid for by the employer.
If you really want to lower or eliminate the pension benefits, then you had better be prepared to start paying people comparable salaries.
This isn’t an “entitlement mentality”. This is appropriate compensation. You don’t care to acknowledge the fact that public servants ACCEPT being paid less than their private industry counterparts because of the fact that they get a pension.
As far as your questions:
I don’t think you should pay more for the pension plan, but I think you should recognize the value of it, and recognize that the increases you are concerned about wouldn’t have to happen if your elected officials managed money appropriately. Remember, my taxes will go up because of this as well, so I am in the exact same boat as you here.
I’ve already answered this one, but again, pensions are what attracts people to public service when they see that their overall earning power will be less than what it would be in private industry. Put a kid fresh out of college out in the job market looking for his first computer programming job, and offer him $39k to work for the state or $70k to work in private. What job do you think he is going to choose if you take away that pension and the ability to retire at 55?
As far as taxes, personal income taxes need to be lowered, and corporate taxes need to be significantly raised as I already illustrated above. School taxes are atrocious. While many blame the salaries of teachers, have you every actually looked at what they make? Around what, $35k to start? Sure, they make much more when they retire, but it’s no golden goose. The real issue is unfunded mandates from Albany, having to teach for two separate diplomas (Regents and non-Regents), and districts, like my own childs school that feels they need a 42 inch LCD TV in every classroom.
You last question is not worth me typing any response other than to say why bother answering it.
Quite simply, you are having the same knee-jerk reaction that every other middle class person is having. CUT! CUT! CUT! Without bothering to look into what really makes sense and what doesn’t. Have you really ever bothered to look at just what the total amount your locality has to pay for pensions each year is? Have you compared this with the total amount of the localities budget? Have you scrutinized the budget to see what useless things your local politicians are spending money on?
Now do the same for the state itself. Last I heard, we are still paying a multi-million dollar a year lease on office space that was in the World Trade Center that no longer exists. Which is more wasteful? Giving employees decent benefits, or paying some uber rich real estate developer money for a lease on a building that no longer exists?
Finally, ask yourself this. As an employee, don’t YOU feel your employer should pay you what you are worth and give you decent benefits? No one would ever answer that question in the negative unless they are lying. So how does that make civil servants any different from YOU?
Comment by maverick100 — September 5, 2009 @ 4:55 pm
Actually Tough Love, clueless means you don’t know anything and what you say makes no sense. I believe that puts YOU in that category, not me, as you can’t even figure out that comparing a police officer to a “private employee” only makes sense if the job is the same. You are basically saying lets compare the salary and benefits of a guy that works at Wal-Mart with a cop.
While you are at it, why don’t you compare a doctors salary and benefits with someone who works behind the counter at McDonalds.
Clueless indeed.
Comment by maverick100 — September 5, 2009 @ 4:59 pm
I can only conclude, maverick, that you’ve been a union member too long to know how the real world works.
You say:
“I don’t think you should pay more for the pension plan, but I think you should recognize the value of it, and recognize that the increases you are concerned about wouldn’t have to happen if your elected officials managed money appropriately. Remember, my taxes will go up because of this as well, so I am in the exact same boat as you here.”
To which I respond:
There is NO value in it for me except higher taxes. Have you seen the reports detailing that by 2105 or so non police contributions could rise to 30% of payroll, while police could go as high as 40%? How is this in ANY way affordable? It isn’t. If YOU want YOUR pension then YOU can pester YOUR elected officials. Don’t count on my tax money. You union people have done a fine job with the legislators anyway. You’ve all but bought & paid for them. 74% of NY’ers wanted a school tax cap, but the UNIONS put a stop to it.
Next, you say:
“As far as taxes, personal income taxes need to be lowered, and corporate taxes need to be significantly raised as I already illustrated above. School taxes are atrocious. While many blame the salaries of teachers, have you every actually looked at what they make? Around what, $35k to start? Sure, they make much more when they retire, but it’s no golden goose. The real issue is unfunded mandates from Albany, having to teach for two separate diplomas (Regents and non-Regents), and districts, like my own childs school that feels they need a 42 inch LCD TV in every classroom.” I least YOU get something from your taxes. I get next to nothing.
Well, at least we agree personal tax rates must be lowered. But, like a typical liberal/union person you immediately demonize corporations. Keep doing that & even MORE jobs will flee NY. I am no lover of big corps, but they do tend to leave oppressive, anti business climates like NY for elsewhere. Hint: Its happening now. As for teachers’ salaries, I don’t know where you’re from, but most in my area earn way more than that. The average for a 4/5 year is a good 70-80K, which extrapolates to a 5/5 year of around 90-100K WITHOUT the big benefits & pensions. Sorry, but gym, library, and shop teachers aren’t worth that much. I damned good math prof? Absolutely. I do agree on the unfunded mandates issue. I’d refuse to pay & give the state a big “Up yours-you want it? You pay for it”. You want some evidence of what a teacher earns in NY? See here: http://www.myshortpencil.com/teachersalaries. As for the union vs. the rest of us? See this 5 year old Time article (its even worse now): http://www.time.com/time/magazine/article/0,9171,1122010,00.html
Or here: http://www.usatoday.com/money/workplace/2009-04-09-compensation_N.htm
The following cracked me up & cemented my impression of you as a real union guy:
“Because the misconception that they are under-worked and overpaid is too prevalent. It’s easy to point the finger and say “You get this, why should you? I don’t”. It’s harder to go to your own employer and demand the same things for yourself instead……..As an employee, don’t YOU feel your employer should pay you what you are worth and give you decent benefits? No one would ever answer that question in the negative unless they are lying. So how does that make civil servants any different from YOU?……. that doesn’t even consider other fringe benefits those in private may get from their employers that civil servants never will, like performance bonuses, paid retreats, or even an office holiday party paid for by the employer.”
LOL! Were it only so easy to waltz into an employer & demand a gold plated pension, superior job security and the like. Seriously, have you ever worked in the real world? We can’t even fire bad teachers, nor can they be sued for malpractice. Some “professionals”, huh? Only in the rarified union world do people the private sector is awash in bonuses and paid retreats. The only “paid retreats” I am aware of are those in my local school budget! Bonuses? LOL! Maybe on Wall Street, but not on Main Street. Put down the union propaganda. As for how civil servants differ from the rest of us? Easy. They are MUCH harder to fire, tend to get salary hikes even in off years, have gold plated pensions, can retire a decade or 2 before the rest of us and more.
Look, I agree that NYS is a rathole of corruption, favoritism, cronyism and worse. But, that doesn’t mean I should have to pay even MORE taxes so you can retire in comfort. Me, and many like me, are standing up and saying NO! If this means payrolls & people get cut and worse then so be it. YOU can take on the legislators YOU sponsored/endorsed & bought. Leave my money alone. Like I’ve said before: Your pension, your problem. If the benefits are too generous, the state mismanaged it or stock market crashed that is not my problem. You gonna make up MY 401k losses?
No, I haven’t gone through the state budget line by line. If I did I’d cut welfare, entitlement programs for those who don’t even try and subsidies for corps not doing their share. I’d also hack away at the unfunded mandates. Unfortunately, I have no control over all that mess–but I can vote down budgets and press for no more taxes. I’ll leave it to you to fight for your largesse. And yes, I have looked at the school budget and note that the vast majority of the expenses are salary, benefits & pension costs. Something like 70% or more, so that’s a real good place to start cutting. A nearly 100% tax hike in the last 10-11 years is oppressive, especially since the primary cause is pensions, pay & benefits. Since private salaries for those that still have jobs & haven’t seen pay cuts have risen what, 25% in the same time I do indeed blame union greed and unwillingness to live the life those who pay them do.
I was serious about people leaving NY in droves. I hope to be one of them someday.
Comment by Metaphysical — September 5, 2009 @ 7:55 pm
Well, Maverick, at least we didn’t devolve into personal insults. I don’t generally believe in that, tempting as it may be at times.
We may have to agree to disagree. I see a 5 figure tax bill get worse on one hand & stagnant wages plus my own retirement issues on the other. I’m pretty much done with NY. We have Schumer, Clinton, Rev Al, Bloomberg, McCarthy and more. Enough idiots for 5 states, yet they’re all HERE. Yup, taxes of that magnitude do indeed make me bitter and angry. Why do so many other states do so much more with less? Were my tax bill only 3K you wouldn’t hear me complain all that much, provided it rose at or less than the rate of my pay. I m not as ready to blame companies, who ultimately provide employment. You ask me “if you agree with a business that has $900k a year in revenue that whines paying $500 in tax a year is too much”. Hard to say. 900k revenue and what is the net profit? No company I know of pays so little tax. We’re always getting creamed.
We both feel the facts support our positions. I see the direct and proximate effects of salaries & pensions in my local taxes, yet see my neighbors let go, housing values dropping and taxes ever rising. The only people making out OK are the teachers and cops, it seems. I don’t begrudge them a good living. Hell, I support it. But, I cannot support annual tax hikes at 2-4X inflation. Simply not sustainable.
Maybe the market will turn around & maybe it won’t. I still invest as much as I can and hope for the best. I wish I too had a pension, but they are dead in the private sector. Most companies can’t afford them. As for organizing? No quicker ticket to unemployment via dead companies. Union companies just can’t compete any more. Too expensive & too restrictive. Were we to rein in pension costs I doubt we’d see an exodus to the private sector. If the private sector were all that better they’d all ready be there. It is not. Perhaps 20-30 years ago you’d have been right, but not anymore. Today’s kids will face a far harder challenge than we did. I’ll bet theirs is among the first generation in recent memory that will not do as well as their parents.
Either way, perhaps it is best to agree to disagree. I’ll see you out there on the front lines protesting ever higher taxes and NY’s nanny state mentality.
Comment by Metaphysical — September 6, 2009 @ 12:36 am
“Either way, perhaps it is best to agree to disagree. I’ll see you out there on the front lines protesting ever higher taxes and NY’s nanny state mentality.”
That’s something you can count on! And I appreciate the spirited discussion with you.
Comment by maverick100 — September 6, 2009 @ 1:01 am
Note from E.J. McMahon:
We welcome all comments, critical and otherwise. However, personal insults and ad hominem attacks will be–and, in the case of this item, have been–deleted. (If you cannot offer a comment unaccompanied by insult, chances are you have nothing worthwhile to say anyway.)
Comment by mcmahon — September 9, 2009 @ 2:04 pm
[...] A New York fiscal watch dog is reporting that tax payers will have to increase contributions to municipal pension funds by 61% which they say are non sustainable. See http://www.nyfiscalwatch.com/?p=1859 [...]
Pingback by Police Pensions Non Sustainable « Now Hold On, No Lights No Sirens — September 29, 2009 @ 11:40 am
[...] Even if the pension fund ends the fiscal year with a gain of over 20 percent, it appears that taxpayer-funded employer contributions will need to more than double over the next five years to make up for the losses of the past three years, based on projections from previous modeling by the comptroller’s office. [...]
Pingback by NY Fiscal Watch — November 17, 2009 @ 3:44 pm