Are you worth the pension?

One of the reasons stated for the economy mess in Greek is their pension system which allows some professions to retire early. For example, a trombonist can retire at age 50 because their profession can lead to late-life breathing problems (AP, 2010). European nations have called for an overhaul of the pension system but the beneficiaries of the system are obviously upset at the prospect of losing benefits, even if it would mean salvaging their country's economy. I guess the Greeks would rather lose all of their benefits as their country goes under than to reduce their benefits.

The state of California has faced their own budget woes for over a year. Pensions though have not been brought up in the discussion. However, in the city of San Diego, the city's pension system for its city employees was under funded for several years, and, in 2003, the Mayor formed a commission to figure out a way to back pay the system. There is still a fight over this issue to this date.

In California's and San Diego's retirement systems, employees can retire as early as 50. Unlike the Greek retirement system, this age is not job dependent. As a matter of fact, most of the service employees who can retire at this age are closer to desk jobs where I guess paper cuts and stress can lead to late-life difficulties. For the state, as long as an employee worked for five years they are eligible for retirement benefits. At least for the city, a city employee must have worked for twenty years before they are eligible for benefits.

For federal, state, and local retirement systems, the tax payer is the prominent payer of the pension system. The federal government gives the military a pension payment after twenty years of service. I currently am receiving a pension from the federal government. I am only 43. If I live for another 25 years, at a minimum, the taypayer will be on the hook for $938,400. That's right, I will be paid a million dollars if I live for another 25 or more years by the taxpayer. Not bad for service to my country. But what was the cost to me? I was on the hook to go into harm's way for my country. Did I do so? No, but the possibility existed. Those who are willing to put their life on the line should be compensated for their duty. Also, for most military members, life in the military is accompanied by family separation - an added stress to an already stressed life. Do we as a nation owe our military members this? I think so.

For state and local retirement systems, they pay into a retirement system that is similar to paying into a 401(k) or IRA. The employee pays a percentage of their income into the system and the employer (the taxpayer) pays into the fund also. When the employee retires they get a monthly benefit. (Note: the federal system is a pay-as-you-go system, which means funds are not deposited throughout the employee's life but, instead, are paid by the current taxpayers.)

The question I have is: are city employees really worth a pension? Unless the employee was a police officer or a firefighter, are they worth the burden to the taxpayer? Think about the Department of Motor Vehicle person or any other state worker who pushes paper. Should they be able to retire at 50 or 55 and continue to receive money that could possibly come from current taxpayers?

For the state of California, the retirement system pays using a formula: years of service times a benefit factor which is based on 2% at age 55 times the last year's average monthly salary. This means that a worker who worked for twenty years with a monthly salary of $3000 would get (20 X .02 X 3000) $1200 per month when they retired. Assuming they live for another twenty five years (55 + 25 = 80 years old), this person would get $360,000, assuming a zero cost of living adjustment. That amount is about 1/3 of the amount I should get.

Is this person worth this expense? The contribution rate is only 3.5%. This equates to a $25,200 ($3000 X .035% X 12 months X 20 years, assuming a constant salary) investment by the employee. So going back to the anticipated benefit of $360,000, this payment over 25 years works out to be a 1428% return on investment. Where else can you get a ROI that high for working for one entity and not having to put your life on the line?

The Greeks wanted state jobs. The jobs were easy and came with nice retirements. Greece is now in the throes of an economic crisis. Were the pensioners really worth the expense?

Mike

References:

City of San Diego Retirement Benefits. Retrieved 25 May 2010 from http://www.sandiego.gov/empopp/benefits/index.shtml

City of San Diego Retirement System: https://www.sdcers.org

Boitard, C. (2010). Greek cabinet agrees radical pension reform. Yahoo News. Retrieved 25 May 2010 from http://news.yahoo.com/s/afp/20100510/bs_afp/greecefinanceeconomy

Associated press. (2010). Greece's early retirement rules breed resentment. USA Today. Retrieved 25 May 2010 from http://www.usatoday.com/money/world/2010-05-18-europeretire18_ST_N.htm