Social Security is healthy compared to public-sector pensions

Social Security is healthy compared to public-sector pensions

Last week yet another missive on the lessons to be learned from Detroit’s bankruptcy was published, this time in Forbes Magazine by Jeffrey Dorfman, an economist at the University of Georgia. Dorfman’s article, “Detroit’s Bankruptcy Should Be A Warning To Every Worker Expecting A Pension, Or Social Security,” clearly implies that future Social Security benefits are as financially imperiled as public sector pensions.

pension, cagle, Beeler, July 31, 2013This is patently false, and spreading this falsehood has dangerous consequences.

Not only are the financial adjustments necessary to fix Social Security far easier to implement than what it’s going to take to rescue public sector pensions, but the sheer size of the public sector pension liability is actually bigger than the total liability for the entire Social Security fund. It is imperative that American voters understand this fact.

In the United States today, about 20 percent of workers are employed by the government (or public utilities that offer benefits on par with government). For recent retirees, their average pension after a 30 year career is more than $60,000 per year, and their average retirement age is 58. Because they retire 10 years before full Social Security benefits are eligible to private citizens at age 68, retired public employees actually comprise nearly 30 percent of the retired population.

The average Social Security benefit is less than $20,000 per year. Critically, the ratio of workers to retirees in the Social Security system is more than 3-to-1, set to move downwards marginally within the next 20 years, whereas the ratio of workers to retirees participating in government worker pension plans is already less than 2-to-1 and is on track to move to roughly 1.5-to-1 within the next 20 years. Here’s how that math stacks up:

According to the U.S. Census Bureau, in 2030, when Social Security will be supposedly approaching insolvency, there will be 99.4 million citizens over 58 years old, and 59.5 million citizens over 68 years old. This means that by 2030 (assuming no public employees also participate in Social Security — which many of them do), there will be 19.9 million government retirees collecting pensions that average $60,000 per year, and there will be 47.6 million private sector retirees collecting Social Security benefits that average $20,000 per year.

Got that? The total pension payouts to government retirees, who were only 20 precent of the workforce, will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion, only 80 percent as much.

Solvency

Now let’s talk about solvency, something that trained economists like Jeffrey Dorfman ought to understand thoroughly. Assuming government’s share of the workforce remains at around 20 percent, in 2030 we will have 247 million citizens over the age of 25. On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; to pay $952 billion annually to 47.6 million retired Social Security recipients, 150 million private sector workers would require $6,337 per year withheld from their paychecks — one sixth as much.

You can tweak the numbers all you like. Use medians instead of averages. Assume the public sector worker actually keeps working, on average, to age 60. Take into account disability payments, which are drawn from the Social Security fund. Assume people collect Social Security benefits before age 68. The stark fact remains: Our government pays more money to its own retirees — who represent 20 percent of the active workforce — than it pays in Social Security retirement benefits to everybody else put together. Financing Social Security, forever, can be accomplished with relatively minor incremental adjustments to withholding and benefits.

It is in this context that two special interest groups, public sector unions, and public/private investment fund managers, would have you believe Social Security is the bigger problem. Government labor unions want our attention drawn away from the cataclysmic disaster facing public sector pensions for as long as possible. They want voters to perceive the problem of retirement security to be one that requires shared sacrifice, when nothing of the sort reflects reality. Pension fund managers are getting filthy rich investing public sector pension fund money, and would love to get their hands on the nearly equivalent funds that currently flow into Social Security.

Dorfman’s final insult is to suggest 401(k) funds provide a more secure retirement than defined benefits. Sure, if you are a fund manager collecting commissions on individual 401(k) accounts, regardless of their volatility.

Benefits

The reality is that defined benefits are always preferable to 401(k) accounts because they greatly reduce market risk and they virtually eliminate mortality risk — i.e., in a pooled fund you don’t have to hope you die before your money runs out. The problem with public sector pensions is simple: (1) They rely too much on asset appreciation, something that is going to be increasingly problematic in our debt-saturated, deficit-ridden, aging society; and (2) they are way, way out of line with what ordinary citizens can ever hope to expect from Social Security.

Fixing public sector pensions is furthered by borrowing some concepts from Social Security, which might be characterized as an “adjustable defined benefit.” Here is the solution:

(1) Base pension benefits on career earnings, not final years of earnings.
(2) Stop using the taxpayers’ money to manipulate global investment markets and just put all the funds into Treasury Bills; better yet, put pensions onto a pay-as-you go financial footing where current workers pay for retiree benefits.
(3) Calibrate benefits so highly compensated participants get a lower pension as a percent of their career earnings than participants with low or average career compensation.
(4) Put a ceiling on annual pension benefits of twice the maximum annual social security benefit.
(5) Whenever necessary, lower pension benefits for all retirees on a pro-rata basis (subject to a floor equivalent to 75 percent of the average Social Security benefit) to the extent the system is underfunded, in order to restore full funding.
(6) Raise the age at which participants become eligible for pension benefits to a minimum of age 60.

Public sector unions and private investment fund managers are allies in what is probably the most egregious fleecing of taxpayers in American history.

*   *   *

Ed Ring is the executive director of the California Public Policy Center and the editor of UnionWatch.org.

21 comments

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  1. Let It Collapse
    Let It Collapse 31 July, 2013, 13:09

    This is a very well written article. But nothing that those of us in the know didn’t understand 5 years ago. So it’s old news to us but very informative to young minds that have been propogandized or void of accurate information.

    The outcome of all this will be a huge financial train wreck. The country is supposed to be coming out of the economic doldrums. However, 1Q GDP growth was 1.8%, later revised down to 1.1%. And the 2Q GDP growth was just revealed: 1.7%. Now how could anyone in his or her right mind say those are positive figure indicating that the economic freeze has thawed??? Only a man possessed or with late onset dementia would make such a claim.

    When China or Japan go down there will be a huge sucking sound. The economy today is a huge interconnected web. No longer are we insulated. Plus, our own economy is in deep trouble with such low national economic growth – even with essentially zero% interest rates and with money printing machines so hot you could fry an egg on them!

    Friends, as a nation we are in very deep trouble. The reality of it all is being intentionally concealed from you. But those who dig deeper understand the truth.

    The public pension system is unsustainable without HUGE infusions of government money – which will result in a $20 bag of peanuts at the grocery store. Social security is already bankrupted. There is no money in the trust. It’s been used for other purposes. It’s basically a ponzi scheme. Those who are collecting today will continue to recieve their crumbs. But those working 2 jobs today to support the SS recipients won’t get a dime without HUGE infusions of gov money.

    When the chickens come home to roost it’s really going to get ugly.

    Prepare accordingly.

    Good luck to all.

    Reply this comment
    • S Moderation Douglas
      S Moderation Douglas 1 August, 2013, 03:54

      ” This is a very well written article.”

      On what planet?

      A. ” average pension after a 30 year career is more than $60,000 per year, ”

      OK so far.

      B. ” and their average retirement age is 58.”

      CalPERS says the average is 60. Close, don’t quibble.

      C. ” full Social Security benefits are eligible to private citizens at age 68 ”

      Epic fail, irrelevant, misleading, red herring, pick your adjective.
      US Census Bureau says average retirement age in 2013 is 62.
      2013 Gallup poll says average retirement age is 61.

      68 is “full retirement age”, NOT the average private sector retirement age.

      On average, public sector workers are NOT retiring “10 years before” private sector. THEREFORE: it does NOT follow that ” public employees actually comprise nearly 30 percent of the retired population ”

      D. ” The average Social Security benefit is less than $20,000 per year ”

      Actually less than $15,000, according to Social Security. Close, don’t quibble.

      E. ” This means that by 2030 …….., there will be 19.9 million government retirees collecting pensions that average $60,000 per year”

      Epic fail, again. $60,000 is only those with OVER THIRTY YEARS.

      As of June, 2012, average CalPERS pension was $2,420
      Average for those retiring IN 2011-2012….$3,025

      So let’s call it ” government retirees collecting pensions that average $36,000 per year” (NOT $60,000)

      F. “19.9 million government retirees” and ” 47.6 million private sector retirees”

      Are worthless numbers because they derive from the mistaken notion that government workers retire ten years earlier than private.

      G. The total pension payouts to government retirees……….. will be $1.2 trillion, whereas the total Social Security payouts to private sector retirees will be $952 billion”

      Worthless numbers. Based on calculations from other worthless numbers.

      Garbage In, Garbage Out

      Got that?

      H. SOLVENCY: ” On a pay-as-you-go basis, to pay $1.2 trillion annually to 19.9 million government pensioners, 29.6 million active government workers would each require $40,343 per year withheld from their paychecks; ”

      GUESS WHAT? It’s NOT a “pay as you go basis”
      (And it’s NOT $1.2 trillion annually)
      Epic fail.

      Even right wing radical Heritage Foundation doesn’t come CLOSE to $40,343. Not even using the worst case “risk free” discount rate.

      I. “Our government pays more money to its own retirees — who represent 20 percent of the active workforce — than it pays in Social Security retirement benefits to everybody else put together.”

      I don’t think so, Tim. GIGO

      J. I suppose one could call this a “very well written article” if stirring dissent is more important than reality.

      Reply this comment
  2. Ulysses Uhaul
    Ulysses Uhaul 31 July, 2013, 13:46

    The readers are burned out on pension blah blah….lets move on and study the reasons for the extinction of the California Republican Party…..perhaps a distance learning Masters Degree is in the offering or GED’S for Hondo, Poodle, Bobo and Let it Collapse!

    Isn’t truth and transparency refreshing.

    Reply this comment
  3. The Ted Steele Conceptual Abstraction Unit
    The Ted Steele Conceptual Abstraction Unit 31 July, 2013, 15:16

    Good point U Haul– but the Repubs are doomed– they will never reject the whacked out ultra right– therefore—they will never regain the power they crave…

    Cal Pers 266 BILLION strong!! Taking care of working people for 100 years! The Repubs do not care about workers or women! Sad to see the party of great moderates like Ike, Nixon and Reagan go to seed like this!

    Reply this comment
  4. S Moderation Douglas
    S Moderation Douglas 31 July, 2013, 18:15

    Garbage in, garbage out.

    It just keeps getting crazier and crazier.

    Thankfully,

    The glass is still at least half full.

    Reply this comment
  5. S Moderation Douglas
    S Moderation Douglas 31 July, 2013, 21:27

    If Ed Ring turned in this paper as a fifth grade assignment, he would rightly get an F- grade.

    This fuzzy math is abysmal, even by CWD standards.

    And yet there are those who will cite these figures in their future rants.

    CWD should immediately retract this article and apologize. Journalistic credibility is at stake.

    Reply this comment
  6. S Moderation Douglas
    S Moderation Douglas 31 July, 2013, 21:38

    I nearly forgot, even with fuzzy math and voodoo pension “facts”:

    The glass is still at least half full.

    Reply this comment
  7. Ulysses Uhaul
    Ulysses Uhaul 31 July, 2013, 21:49

    Teddy is always pleasant, polite and a true sage….pensions afford workers with independant living in retirement…Cavers feel cheap labor and shoving old people into government welfare are good business practices….globalists and Ivy League punks are despicable!

    Reply this comment
  8. Rex the Wonderdog!
    Rex the Wonderdog! 31 July, 2013, 23:33

    ED Ring hits another homerun…and Teddy strikes out yet again!

    Reply this comment
  9. stolson
    stolson 1 August, 2013, 08:22

    wow…good article. Pensions are the hot topic. The healthcare payment part (that which the retiree pays per month) is one that will be increased — or if Obamacare rules–they might be shifted this plan. As many cities and towns experience less monies coming in, some type of reduction might come into play on the pension plans. They are not at all sustainable as is. This is not a doomers statement, but what is a reality for today and the foreseeable future. There has been ‘talk’ about not needing these unions for teachers, healthcare workers, and some others. I wonder if they will be given a choice soon?

    Reply this comment
  10. Steve Mehlman
    Steve Mehlman 1 August, 2013, 10:52

    Big news about this article is that the Dog allowed a headline that says “Social Security is Healthy…” Wow, that’s sure an improvement over the typical right-wing rant that Social Security is going bankrupt tomorrow morning.

    FACT WARNING TO REXIE: The following is a statement of fact, so I wanted to give you fair warning. Since you completely ignored the facts by S Moderation Douglas above, thought you would want to skip this as well.

    EVEN IF NOTHING IS DONE, SOCIAL SECURITY WILL PAY FULL RETIREMENT BENEFITS UNTIL 2035.

    (This has been a fact warning. Rex is free to resume his normal diatribes.)

    Reply this comment
  11. The Ted Steele Conceptual Abstraction Unit
    The Ted Steele Conceptual Abstraction Unit 1 August, 2013, 11:13

    Steve– I’m not sure he can read.

    Reply this comment
  12. Steve Mehlman
    Steve Mehlman 1 August, 2013, 12:48

    Sure he can, he’s a charter subscriber to Rush’s Dittohead News.

    Reply this comment
  13. BillyB
    BillyB 1 August, 2013, 13:24

    The bottom is falling out very, very soon. Reading won t matter. Accuracy throwing rocks will— to immobilize one’s prey…once neighbors. Fun.

    Reply this comment
  14. S Moderation Douglas
    S Moderation Douglas 1 August, 2013, 20:28

    My apologies. I googled Ed Ring. Apparently this is not his first trip to LaLa Land. It’s a recurring fantasy.

    Last time it was $43,000 from each worker. Doesn’t he have a friend honest enough to tell him he’s making a fool of himself?

    Scary part is, on the last article, there were posters telling him how right he was.

    MY glass is at least half full, I don’t know about some of you others.

    Reply this comment
  15. Ted
    Ted "Eddy Baby" Steele, Associate Prof. 2 August, 2013, 07:08

    Douglas– Mine is 5/8 full and poor Ed has made a few trips to tin foil hatsville for sure…

    Reply this comment
  16. Ed Ring
    Ed Ring 2 August, 2013, 11:47

    S Moderation Douglas:

    The purpose of referencing the 30 year threshold for public sector pension “averages” is because that is the typical length of a public sector employee’s career. People in public service vest pension benefits within 5-10 years, and for any beneficiary who only worked 5-10 years, for example, there would have to be another person earning benefits who worked the other 20-25 years. The position was filled and the same amount of pension benefit liability was created, regardless of the mix of full-career vs. partial-career participants. And by the way, both CalPERS and CalSTRS pay recent 30+ year retirees nearly $70,000 annual pensions. If anything I was understating the amounts.

    Since one of the primary points of the article was to ballpark the size of the total public sector pension liability compared to the size of the total Social Security liability, the 30 year mark to set the average was as good as any, since mathematically, you’ll calculate the same public sector pension liability regardless of the mix of full-career vs. partial-career participants. More generally, when you recite these much lower averages for pensions you must know this is misleading. Most of us expect to work 30 years or more, and if we don’t, we don’t expect to get a full retirement benefit.

    As for the name calling, save it for when you’ve exposed a serious flaw in my logic or my numbers.

    Reply this comment
  17. Rex the Wonderdog!
    Rex the Wonderdog! 2 August, 2013, 15:06

    C. ” full Social Security benefits are eligible to private citizens at age 68 ” Epic fail, irrelevant, misleading, red herring, pick your adjective. US Census Bureau says average retirement age in 2013 is 62. 2013 Gallup poll says average retirement age is 61. –
    ==
    EARLIST age for SS is age 62, the AVERAGE age is 66.

    You are using SSI number WITH SS numbers you fool Douglas!

    Reply this comment
  18. Rex the Wonderdog!
    Rex the Wonderdog! 2 August, 2013, 15:08

    (This has been a fact warning. Rex is free to resume his normal diatribes.)
    ===
    The Ted Steele Conceptual Abstraction Unit says:

    Steve– I’m not sure he can read.
    ==
    Steve Mehlman says: Sure he can, he’s a charter subscriber to Rush’s Dittohead News. –
    ============
    You two kill me 😉

    Reply this comment
  19. S Moderation Douglas
    S Moderation Douglas 2 August, 2013, 17:27

    Sorry, Ed. Your math won’t fly.

    A.  Your ”part-career” workers are already accounted for in the averages. 

    B.  For most of my fellow workers a “typical career” is forty years (usually following service and/or college) I personally stopped at 37 years only due to health problems. 

    C. Public sector workers STILL don’t retire ten years before private, on average. 

    D. Defined benefit pensions are still not a “pay as you go” system. 

    E. When  David Crane promulgated the “2,000 percent increase” in pension cost ploy, it had good shock value, as intended.  A big, scary number, often repeated. We very soon figured out it was cherry picked data,  virtually meaningless.  But it at least had basis in fact. 

    F. Meg Whitman repeated time and again that “California has 12% of the nations population and 33% of the nations welfare cases”.  Big scary numbers whose main purpose was to get her elected. Those numbers are still often repeated and are STILL incredibly misleading. 

    The cases she speaks of are a minor part of the total California welfare expenditures. In TOTAL welfare spending, California has 12% of the nations population AND 12% of the nations welfare COST  In per capita welfare pending, California is not even in the top 10% of states. 

    BUT! Her statement was technically true (although virtually irrelevant). 

    G. ” 29.6 million active government workers would each require $40,343 per year withheld from their paychecks ”

    Is another big, scary, shocking number, meant to ……..what?

    But, unlike Crane and Whitman, this number has NO basis in fact. It is pure fabrication. Fallacious logic and/or cunning linguistics. 

    H. Take your article to a fifth grade math teacher. Better yet, try to get it published in a reputable newspaper or magazine.  Let me know what happens. 

    The glass is still at least half full. 

    Reply this comment

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