Friday, December 9, 2011

Time For Public Pension Reform

When you hear a public employee, whether it be a teacher or a county employee complain that they don't make the kind of income they could in the private sector, just ask them about their pension benefits.

The Taxpayers United of America just released data on pension payouts in Michigan. Remember, pensions to retired public employees are paid for by YOU, the taxpayer.

Here are a few examples from the Taxpayers United of America web site:
  • The top 100 retired teachers are collecting at least $90,000 per year in pension benefits
  • The top 25 Ingham County retirees are collecting between $55,000 and $64,000. (This is based on average annual salaries of $49,000 and retirment at age 55)
  • The top 25 Kent County retirees are collecting between $67,000 and $96,000, annually.
Assuming retirement at age 55 and 30 years to collect, total payouts can range from $1.6 to $6 million! And every dime of it has to come from your state and local tax bill. How many "working stiffs" in the private sector are seeing that kind of benefit? Well, if you wanted to set up a pension for yourself by saving every year out of your paycheck, it would go something like this:

Assume you want to receive $100,000 per year, like over 50 retired teachers in Michigan. How much would you need to save every year? You can use a payroll deduction into a 401k type savings plan. This way, you can use pre-tax dollars. Now, let's assume you can earn an average of 5% interest every year on the money you save. Let's also assume that you want to retire at age 55 and have a perpetual fund of cash to pay you $100,000 per year.

Using those assumptions, you would need to start working at age 20, work and save for 35 years, and put away $22,143.42 each year (1845.25 per month) for your retirement. When you reach age 55, you will have $2,000,000 in the bank, from which you can draw $100,000 per year. If the principle continues to earn 5% per year, you should still have a bundle left over at age 85 to leave to your children or to charity.

Yeah, I guess it's time for pension reform. The simple solution would be to convert all public employees to defined contribution retirement plans from the defined benefit plans they now currently enjoy. Most state employees are on defined contribution, they were converted from defined benefit over ten years ago. But education and municipal employees are still on the defined benefit pension system. Pension benefits are putting an undue strain on the budgets of cities, counties and school districts around the state.


Anonymous said...

Lets tell the truth about whose really at fault. Municipalities CHOSE not to maintain annuity payments, disregarding advice from many accountants and experts. Poor leadership and money mismanagement is the fault NOT of the worker who NEGOTIATED and Bargained WITH said leadership. The observation that those places are short on annuity is a violation of contract, and villainy claims of labor is merely corporate espionage.

Anonymous said...

your response above has validity but the reason why the government leaders did not provide adequate funding to these pensions was because there was not enough tax payer income from taxes to fund such promises. If the local governments were required to fund these pension obligations at the time of negotiations these government union negotiations would have broke down and never been made. It was to the Union's advantage for the elected officials to not fund these obligations immediately so the unions could add on to their already bloated benefits. Yes; if the elected officials would have been responsible at the time these contracts were made the government employees would never have gotten the deals they now have.