Mt. Vernon Register-News

December 24, 2013

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The Register-News

---- — Almost every day we are reminded how the billions of dollars in unfunded pensions for state employee retirees and teacher retirees have become the major issue for our state. A lot of finger pointing and placing blame for our sorry condition is publicized daily.

Some say it is strictly mismanaging and lack of proper funding in the past that has caused us to become a national disgrace in this area with declining bond ratings and a reputation of fiscal mismanagement that has been ongoing for years. I want to state clearly and up front that nothing in this article is meant to be disparaging to any public servant, teacher, policemen, fireman or any employee in the system. I respectfully state that they are on the whole honorable people doing sometimes very difficult — and in some instances — possibly dangerous jobs.

My sole purpose is to contrast the huge difference between the public and private sector in the area of retiree benefits and pensions using examples that I have knowledge of with simplified examples or “Rip speak” as I frequently say.

I have stated in the past how ignorant I was about anything political or public because until I retired, I just did not know. Some of what I will use in the contrast is personal knowledge in the private sector and a lot will be what I have learned by reading and research since I retired.

I learn something almost daily that if it does not shock me, it certainly gets my attention about how the public sector operates. I want to state again this is not meant as a putdown of folks in the state, county, and city jobs. It is intended to point out how far our leaders have taken them from the real world and why there is so much talk and blame being discussed publicly.

I find it similar to General Motors and the UAW almost going belly-up several years ago because of agreeing to items that were just not sustainable. The unions received some protection when the government bailed them out while the bondholders took a haircut, as they say when they do not get full value returned from investments.

Now, we are starting to see cities applying for bankruptcy and somewhere near the top of the list of reasons you will see is unfunded pensions listed as part — sometimes a large part — of the problem.

Let’s discuss an example in the private sector first. Let’s try comparing two folks earning approximately $35,000 to $40,000 a year. These numbers are just typical and not accurate for everyone, but they do tell a story. They just illustrate a fundamental difference.

For many years companies operated “defined benefit” plans for retirees. Simply stated, you received a defined amount of money per month based on your years of service. A lot of these plans in many companies have now shifted to “defined contribution,” a company will define or negotiate the amount of contribution they will contribute and the employee would have some control over where it is invested for his retirement depending on his risk tolerance.

Since I have never worked with a defined contribution plan, I am going to attempt to contrast private and public pensions using defined benefit for both sectors. In some instances, private companies like the one I worked for have frozen the defined benefit for years. Locally, it was frozen in 2005 or 2006, and I do not know if it has increased lately. These numbers are just used for examples.

What I mean by frozen, is that it was not increased from several years ago when the defined benefit was $55 per year of service and if the employee worked 30 years, his monthly defined benefit would be 30 multiplied by $55 to come to a total of $1,650 per month.

When he reached 62 to 67 years of ag,e he would be eligible for Social Security and possibly add another $1,200 to $1,400 or roughly a total of $3,050 per month defined benefit monthly pension.

Do not hold me to these numbers. Some folks retire earlier with less years of service and some retire later with more, but I think you will see that a huge difference exists in total payout by the taxpayers for public versus private plans.

I used basically equal salaries to take out the argument about earnings in the private sector being more than public because that is no longer true. They are good enough to illustrate the differences I want you to see; it is another subject, but in the industry I worked in the company contribution for medical care for retirees has been frozen for several years and we all know how that cost has increased.

Also in this industry, workers have been able to retire after 30 years service regardless of age. Most of them cannot unless they have other jobs because of medical and the need to reach the age for Social Security to kick in.

Now let’s take a look at a hypothetical situation and use basically the same wages for both sectors. Johnny retires at 62 years old, with 35 years of service: 35 x $55 = $1,925; takes Social Security early at 62 years for $1,200 for a total of $3,125 per month.

Now, let’s look at the difference between the private and public sector pensions and why a large part of the problem is a mandated 3 percent annual increase for a lot of public employees versus small increases in Social Security in the private plan for a lot of employees.

Life expectancy is reported — although much lower than other countries — to average 79 years in the United States. Johnny will probably not receive any increases in his pension from the company for 17 years and the cost of living on Social Security of 1 to 2.5 percent, depending on inflation. The total pension cost of the company for private plan $1,925 x 12 months x 17 years = $392,700 plus Social Security $1,200 x 12 months x 17 years x 2 percent compounded annually = $314,100. The grand total, if the employee lives to 79 years is $706,800.

Now, let’s take a look at James in the public sector. Some employees retire at 55 or earlier with 30 years’ service at 75 percent of a $40,000 annual salary or $30,000 with 3 percent compounded annual increase on $30,000 x 24 years annual increase for 24 years = $1,124,761.

After 10 years, James could be receiving what he was making before retirement or close to $40,000, and exceed every year thereafter what he received while working. In very few places can you make more in retirement than while working in the private sector.

A difference exists between our hypothetical Johnny and James of $417,961 because of the mandated 3 percent annual increase and the ability to retire at 55 years of age or less.

There are reports that this could be as much as one-third of the $80 billion unfunded pension problem in the state, along with another large percentage from poor investment decisions of pension money.

Taxpayers cannot afford this. They now report attempts to tackle this problem through reform and changes at the state level. How are we tackling this similar problem at the local level other than asking taxpayers to pay more? Where is the reform program? Are the taxpayers expected to fund the reported $16.5 million unfunded pensions at the city with continuous tax increases?