There's an oft repeated myth being fed by many that claims the defined benefit pension plans available to most public employees are going bankrupt.
While a new report by the Pew Center for the States feeds those myths, Pew's research paints a false picture of pensions. Here are five oft-peddled myths about public pensions followed by the facts.
1. Pensions are going bankrupt.
The methods used to calculate a pension system's funding level are quite complicated and convoluted, which has enabled detractors to point to the funds in a few states -- Illinois, Rhode Island, Connecticut and Kentucky -- where funding shortfalls are notably higher.
Pew's "new" report relies on data from 2010, but that snapshot gives an inaccurate portrayal of the current fiscal health of pensions. In 2010, when the recovery was not as far along as it is today, 16 states were above the threshold that Pew says is necessary to qualify for good fiscal health. The number of states meeting that threshold today is probably much higher. For example, in Wisconsin the primary pension fund is 99.8 percent funded today. In the state of Washington, pensions are 119 percent funded today. In North Carolina, pensions are 100 percent funded today. Perhaps most important, pensions will continue to recover steadily as markets rebound.
2. States are facing an "unfunded liability" in excess of anywhere from $3 trillion to $757 billion.
The concept of an "unfunded liability" is misleading because pension benefits are paid out over decades. A mortgage represents a good analogy. Imagine newlyweds, both of whom work, buying a $300,000 home and putting $20,000 down. The $280,000 they owe represents an "unfunded liability," but like pensions, that money is not due all at once. It is due over 30 years, under the terms of a typical loan agreement.
Opponents of public employee pensions have skillfully portrayed pension liabilities as a bill that is due today. If homeowners had to pay the full cost of their home at the time of purchase, 99 percent of us would be renting. But homeowners don't have to pay for the homes all at once, so it's very misleading to portray pension funds in that light because pensions are paid to retirees over many decades.
3. States can no longer afford to pay benefits.
Payments to pension systems account for less than three percent of state budgets. Most of the funds in pension plans are not even provided by taxpayers -- two-thirds of all pension assets are contributed by employees or earned on investments.
Where pensions are underfunded, it's overwhelmingly because of the recession and because states took "pension holidays," which means politicians declined to make their state or locality's annual contribution -- breaking a promise to the public servants of that state and in a bad faith effort as the fiscal stewards of taxpayer dollars. Had they simply honored their commitments when times were good, virtually no state pension system would have unfunded pension liabilities that raise concerns.
This approach has worked for opponents of pensions because it allows them to shift blame to workers, but it does not change the fact that it advocates allowing states to ignore their responsibility to the people who perform the work to protect the public, teach our children and keep the state providing many other valuable services to its citizens.
4. Public employee benefits are overly generous.
Since pensions are now virtually non-existent in the private sector, and because the recession decimated the nest eggs of everyone with money in the stock market, opponents of defined benefit pensions have gained traction with this argument by creating and fostering pension envy.
The story that isn't told is that the pensions public employees receive, in most cases, are the only source of income those workers receive in retirement since most are not allowed to collect Social Security. And the median benefit of those receiving a pension paid by a public employer is $23,407, according to the National Institute for Retirement Security.
The hope is that their pension gives the average public worker the ability to pay their basic bills, but they definitely aren't getting rich in their old age.
CEO pay provides a better example of overly generous pay. Apple CEO Tim Cook earned $900,000 in pay and performance benefits in 2011 and received restricted stock worth $376 million that vests in 2016 and 2021. CEOs of the S&P 500 Index companies earned 380 times the salary of an average worker in 2011, according to the AFL-CIO's Executive Paywatch study.
5. We can fix the pension system by converting to 401(k)-style defined contribution plans.
There is a well-financed effort to force 401(k) plans as the solution because Wall Street firms stand to earn billions of dollars in fees if pensions are converted to 401(k)s.
But the momentum of that effort is dwindling because 401(k)s have provided investors with a paltry return over time. Think about what has happened to your own 401(k) since 2008 and whether the money in that account would be enough to sustain you in retirement.
A 60-year-old who worked for 30 years has an average 401(k) account balance of $172,555, according to the Employee Benefits Research Institute. That will provide retirement income of only $575.18 per month. It would take a 401(k) account balance of $1,000,000 to provide $40,000 annually over one's lifetime. To achieve a $1,000,000 account balance, you would need to contribute $1,000 a month every month for 30 years and earn a 6 percent return [after fees]. With an estimated 20 million Americans unemployed or underemployed and with real wages stagnant for decades -- average hourly earnings for all private-sector production and nonsupervisory workers across the economy have risen just 5.3% to $19.72 since 2000, according to the Bureau of Labor Statistics -- those who work for a living in this country over the past 30 years, not many have $1,000 to save every month after paying their bills.
The real retirement crisis is not in the public sector. It is in the private sector. The average 401(k) balance today is just $71,500, according to Fidelity Investments. Americans whose retirement security relies on Social Security supplemented by such small balances in 401(k)s must consider how they will avoid falling into poverty in their retirement years and states will need to figure out how they will provide welfare to those who do.
401(k)s were always intended to supplement -- not replace -- one's retirement income. About 10,000 Americans a day are turning 65 years old, according to the Pew Center for the States. While Wall Street's 401(k) plans have done nothing to help retirees enjoy their golden years, defined benefit plans are the best way to support retirees and allow them to continue to contribute to their local economies.
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And true I wouldn't like a fire truck full of 60 year olds pulling up at my house, but I also know many fireman have second careers, due to their relaxed schedules. I know your argument will be that they risk their lives for us, though that is true, but most public sector employees do not, including teachers.
This article looks like it was meant to be a poster child for the public sector unions, and nothing more.
Public employee salaries are higher than private sector for the same jobs as the article reference below will inform you. “Public employees earn higher average salaries than private-sector workers in more than eight out of 10 occupations, a USA TODAY analysis of federal data finds. These salary figures do not include the value of health, pension and other benefits, which averaged $40,785 per federal employee in 2008 vs. $9,882 per private worker, according to the Bureau of Economic Analysis.”
More importantly, the pensions they are promised at our expense are literally bankrupting cities (Stockton, San Bernardino). Note extremely liberal San Jose and San Diego voted by 70% to 30% to curtail public employee pensions which are taking money away from much needed public services, the poor, the universities, and we could add teachers too.
http://www.usatoday.com/news/nation/2010-03-04-federal-pay_N.htm
An outside agency has been hired to determine how best to reorganize Kentucky state government IT. One of their findings was that we are dramatically underpaid. No surprise here.
According to Taxpayers United, Rand Paul's anti-tax organization, the average Kentucky retiree makes $20,400 a year in retirement income. That includes the retirement of the "top brass", who actually do quite well in their retirements.
The average working employee gets screwed working in the public sector. And pressure is continually mounting to hurt our incomes even more. Working in the public sector is a constant battle to maintain morale. Everyone I know is completely devastated on the job. There is constant pressure pay and benefits even more. At this point, I just want to make it to retirement and get out.
At the same time, Schaitberger is quite right about private pensions. When millions of retired Americans don't have enough to live out their lives in some dignity, there will be a political price to pay.
Defined contribution 401(k) plans were never intended to be a pension replacement for employees. They were originally created as a perk for highly paid executives, and were originally called “salary reduction plans” before being renamed for the tax code that makes them possible. The thinking was, the more these executives were paid, the more they could afford to contribute from their paychecks, and the more they had for retirement – on top of the old stand-by pension and Social Security. Another perk was that DC plans are portable – convenient for executives who company to company.
It all sounds pretty good when the markets are hot and delivering high returns, which is why so many Americans clamored to get in on the 401(k) action starting in the 1980s.
NEA did an article on WV that replaced pensions with 401k. The state actually lost money due to folks being in a risky financial situation with a 401k vs. a pension and would end up costing the state more money in public assistance rather than in pension costs., http://neatoday.org/2012/03/23/why-a-401k-is-no-replacement-for-a-pension/
If it takes a net 6% rate of return and $1000/month to get $40,000/yr in retirement, then a public sector worker gets $1,000,000 over their career in addition to wages and healthcare cost. The average family policy is around $15,000/yr. Together that is $32,000/yr of salary in addition to wages. Most private sector workers don't even get close to that.
Today interest rates are only 3% on a 30-yr bond. Also many public sector workers retire before 30 years of work. So the total value of the pension benefit may be well higher than $1,000,000.
I work in a field in which you can work either public or private sector. The private sector jobs pay about 25K more per year than the public sector jobs that offer pensions. This seems about even to me.
There is a larger issue with pensions. When the private sector runs out of money they stop hiring (or go bankrupt). When the gov't wants more teachers but does not want force people to pay more taxes now, they increase the deferred compensation (pension, healthcare, etc). By pushing the cost in the future they get to play the good guys and not make any real choices.
Is this deferred compensation are even in the best interest of the public workers themselves (to mark's point)? As we have seen on San Diego and San Jose, but also in countries like Greece when these promises get too big they get cut. Wouldn't it be better to get more of your money now rather than trust the same politicians who will not raise taxes to pay the pension contributions? If the gov't is not willing to give you the $500/month cash now, why would you think they would eventually pay-in-full later?
With the 401(k), I know what I've put in. I know what my employer put in through the company match. I am in control of what investments are made. I know what stocks comprise the mutuel funds and ETF's that I've selected. The 401(k) seems pretty clear and straight foreword to me.
The employee contributes.
The company contributes.
The contributions are invested into carefully-managed, low-risk portfolios.
When the economy is down the fund draws on incoming capital to meet its needs. When the economy is up the fund re-invests the excess to create padding for lean times.
The best part about pensions is that it creates a sense of company loyalty. The workers know that if they stick with the company and help it succeed they will be taken care of when they retire. It is a benefit that breeds unity and helps morale.
Of course, it also bites into the ability for the company to pay out millions of dollars to a handful of executives. And therein lies the problem.
http://www.statebudgetsolutions.org/blog/detail/public-pension-infinite-amortization-puts-taxpayers-in-debt-forever