Americans are facing two very different pension outlooks. Most private sector workers contribute to 401(k) plans (which are often matched by employers), and rely on investments, savings, and Social Security for their retirement. But, their savings is inadequate.
According to a 2018 survey by Northwestern Mutual, 33 percent of Baby Boomers have less than $25,000 in retirement savings. No wonder nearly 4 out of 5 Americans are “extremely” or “somewhat” concerned about having a comfortable retirement.
Contrast these concerns with the comfortable retirement promised to state and local government workers. State and local workers are promised generous defined benefit pensions that few private sector companies offer any longer because they are unaffordable.
Making matters worse, thanks to complicit politicians, the state and local governments have failed to adequately fund these overly-generous pensions. The large and growing public pension debt crisis is the inevitable result.
Without changes, public employee pensions are not sustainable. But, fully funding these pensions is unfair to taxpayers who will inevitably be asked to pay higher taxes to fund pensions that are bankrupting the state. Further, higher taxes will jeopardize private sector workers’ already tenuous retirement prospects.
These lavish pensions create reform opportunities. Due to overly-generous promises, the twin goals of ensuring a secure retirement for public sector workers can be achieved without bankrupting the states or imposing growth-crushing tax increases. A recent report I authored for the Pacific Research Institute illustrates this possibility for California’s pension systems.
Exemplifying California’s excessive pension generosity, there were over 40,000 retirees in California who were members of the “$100K Club,” or those pensioners who took home pensions of $100,000 a year or more in 2017. The average take home pension for members of the $100K club was $124,000. While $100K club members were only 4.8 percent of state retirees, their pensions are an out-sized amount of the total payments – 15.1 percent of total public pension spending.
How does this compare to the incomes earned by regular Californians? The average pension earned by a $100K Club member is 83.6 percent higher than California’s median household income. Worse, it’s more than 150 percent higher than the average income for households over age 65. Capping the pensions of $100K Club members at $100,000 (a very generous pension) could save nearly $1 billion a year!
Even the non $100K club members are doing exceptionally well, particularly because the typical retiree’s pension is not based on a typical full private sector career. The average California Public Employees’ Retirement System (CalPERS) retiree worked for 45 percent of a typical career, while California State Teachers’ Retirement System (CalSTRS) members averaged 55.6 percent of a typical career.
Since the average public sector worker had the opportunity to earn additional pension savings at other jobs, or could enjoy a longer-retirement, the value of the average retirees’ pension is much more generous than it appears. Adjusting for the full-career, the average pension was worth over $78,000.
Why should hard-working Californians, many of whom face uncertain retirements, be asked to pay higher taxes, or endure painful budget cuts to schools, public safety, parks, and hospitals, to fund gold-plated public pensions? They shouldn’t.
The good news: a pending state Supreme Court case could give politicians the power to adjust pensions for current workers going forward. Ignoring the political constraints, the ideal reform would adjust public pensions to factor in how long the employee worked for the state, and ensure payments are in line with what the average California household earns.
If pensions were adjusted such that the average full-career equivalent pension equaled California’s median household income, a comfortable pension benchmark for the average government employee, California’s pension system would save $5.5 billion annually. The current value of these savings over 30 years would be $68.5 billion.
Going a step further, if pensions were adjusted to the median income of California’s retiree-aged households, the pension system would save $12.9 billion annually, or $160.2 billion over 30 years.
While the ideal reform recommendations are made without regard to what’s politically possible, politics can’t change economic realities. Without changes, California’s current pension debts are unsustainable, and Californian’s economic prosperity will suffer. While the political will may be lacking, the opportunity exists for state lawmakers to reform pensions, eliminate the pension debt, maintain California’s fiscal viability, and still ensure that public employees have a secure retirement.