Popping the Public-Pension Bubble
Public-employee unions underestimate the magnitude of California’s unfunded retirement liability.
With the day of reckoning approaching for California’s lavish but disastrously underfunded public-employee pensions, union partisans have tried to persuade the public that reformers are engaged in “pension busting.” But to believe that reformers are waging a partisan vendetta against state workers’ pensions would require ignoring a mountain of data. The fact is, only by skewing the averages can the unions maintain that they’re victims of a campaign against their “modest” pensions.
The union arguments are deceptively straightforward, rehearsed constantly by their talking heads and, unfortunately, repeated by a sympathetic and innumerate media. A master practitioner is Art Pulaski, chief officer of the AFL-CIO’s California Labor Federation. In an online debate at the Sacramento Bee in March (which also included City Journal associate editor Ben Boychuk and frequent City Journal contributor Steven Greenhut), Pulaski claimed that the average pension that California’s retired state workers collect is not much more than what they would receive under Social Security. “The average state worker gets a pension of $24,000 and often without Social Security,” Pulaski said. “Not lavish by any means.” More recently, the Bee published a column by Martha Penry headlined PENSION ‘REFORMERS’ DISTORT FACTS ON BENEFITS. The paper identified Penry as “a special education teacher’s assistant in the Twin Rivers school district,” but it didn’t disclose that she’s also a high-ranking union official who serves on the board of directors of the California School Employees Association. Penry accused “pension busters” of overstating the cost of pensions and the amount of the average pension. “Three quarters of CalPERS retirees collect yearly pensions of $36,000 or less,” she claimed.
But neither Pulaski nor Penry acknowledged that their averages included retirees who hadn’t worked full-time, as well as those who worked barely more than the minimum vesting period of five years and those who retired over a decade ago, back when pay rates and pension formulas were still within reason. A more honest assessment of the average pension would examine rates for people who spent their entire careers in government service and are retiring now, under the current pay scales and pension formulas. According to the most recent annual reports of both the California State Teachers’ Retirement System (CalSTRS) and the California Public Employees’ Retirement System (CalPERS), the numbers are far from modest. For example, a teacher who retired in 2009–10 with 25 to 30 years of service could expect to receive about $50,772 a year in retirement pay, on average. A teacher with 35 to 40 years of service could expect just under $87,000 a year. The figures are similar for state employees enrolled in CalPERS. The average state worker who retired at the end of 2009 after 25 to 30 years of service would receive $53,182. A retiree with more than 30 years of service could expect $66,828 per year, on average. By contrast, the maximum Social Security benefit for a person retiring at age 68 who earned a peak salary of $125,000 is only $31,000.
Penry also made an astonishing claim about how much taxpayers put into state pensions. “Public employee pensions amount to just 3 percent of California’s budget,” she wrote. This is grossly misleading, because a growing share of the state budget’s billions in funding for local governments—which are listed separately from its pension contributions—do wind up paying for local workers’ pensions. The precise percentage of state contributions to CalPERS and CalSTRS depends on how one reads California’s Byzantine budget. But a close look at the state Department of Finance’s breakdown of state revenues and expenses for 2009–10 reveals that of $206.1 billion in revenue from taxes, bond sales, federal funds, and “special funds,” the state actually spends closer to 10 percent of the budget on state and local government pensions. And that’s a conservative estimate, because local-government pensions tend to be much more generous than pensions for state workers. If CalPERS and CalSTRS lower their long-term investment-return projections—which may be inevitable, given nearly half a trillion dollars in unfunded liabilities—the state may need to double its pension contributions to maintain the funds’ solvency.
But here may be an even easier way to gauge the public’s growing liability for public-employee pensions: California has 1.85 million state and local government employees. Using an average career of 30 years and an average retirement of 20 years, the Golden State is on track to see 1.25 million retired state and local workers collecting, on average, $60,000 per year in retirement pension payments. That’s $75 billion per year and growing. Should taxpayers, the vast majority of whom can expect Social Security benefits of no more than $15,000 a year on average, really be expected to fund those retirements? Will they do so willingly? Not likely.
Penry is right about one thing: Simply reducing public-pension benefits won’t solve California’s budget woes all by itself. The base rates of pay for most government workers would need to shrink, too. The unions representing government workers seized the opportunity when the economy was enjoying a phony real-estate boom (following the tech boom before that) to negotiate dramatic increases to their compensation packages. They seem blind to the need to modify those packages now that the bubbles have burst.
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