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How to Get Rich in CA: Work for Govt.
By CHRISS STREET The number is shocking. Some retired state and local workers will make in retirement nearly twice as much, on average, as private-sector workers. For them, working as public servants literally turned into a gold mine. The Center for Retirement Research at Boston College just released an analysis, “Comparing Wealth in Retirement: State-Local Versus Private Sector Workers.” It determined the wealth effect in retirement from 1996 to 2006 for former public employees versus the private sector workers at age 65, after adjusting for workers with similar characteristics of education and experience. It found, ”The results show that spending more than 50 percent of one’s career as a state-local worker is associated with 11 percent to 18 percent more wealth at age 65″ The data for the report was produced by a long-term nationally representative study that tracked more than 12,650 people in 7,600 households since 1992. It asked the participants questions about financial standing, spending habits, retirement, pensions and employers. The Boston College analysis determined that the dominant difference in wealth at retirement between private and public sector employees turned out to be that private-sector employees now rely on their self-directed 401(k) defined-contribution accounts and Social Security payments. But public employees rely on defined-benefit pension payments. At the 2006 conclusion of the study, 78 percent of state-and-local government employee households in the sample received a defined-benefit pension, compared to 59 percent of private-sector households. This high proportion of private-sector workers with defined benefit pensions shrank dramatically during the study that began in 1992. Private-Sector ShiftBeginning 1980, there has been a rapid shift away from private-sector, employer-based, defined-benefit pensions, to employee-controlled personal retirement accounts. In 1980, approximately 92 percent of private retirement saving contributions went to employer-based plans; 64 percent of these contributions were to defined-benefit pension plans. But by 1999, about 88 percent of private-sector contributions went into defined-contribution plans. The vast majority of personal retirement accounts were 401(k)s and Individual Retirement Accounts (IRAs). Private-sector workers with 401(k) and IRA personal retirement accounts were advised to invest in the stock market to earn high returns, and as a hedge against inflation. By contrast, public-sector workers’ defined-benefit pensions generally guaranteed returns of approximately 10 percent a year, including 8 percent on investments and an average of 2 percent cost-of-living inflation hedge. Public-sector employees, since the peak of the stock markets in 2000, enjoyed the equivalent positive 10 percent yearly compounded investment return from defined benefit pensions — a total of a 235.8 percent increase. By contrast, look at the 23.4 percent loss for inflation in the chart below: Private-sector 401(k)s suffered real-world investment losses of 28.9 percent from the Dow Jones Industrial Average (the green line), 43.2 percent losses from the broad Standard & Poor’s Index (the blue line) and 63.1 percent losses from the speculative NASDAQ Index (the red line).
Bill Gross, managing partner of Pacific Investment Management Company (PIMCO), the largest fixed-income manager in the world, recently made brutal comments regarding the current public-sector pension strategies to recover their massive real-world losses over the last ten years: “In the early nineties, plan sponsors, if biased in their forecast, were generally biased toward conservatism. From 1997 through 2007, expectations, although a bit rosy at times, were largely within the realm of reasonableness. In our view, a long-run equity risk premium of 11 percent is pure jibber-jabber. It is wishful thinking.… Hope is neither a training plan nor an investment strategy.” Given that the return to private-sector 401(k) investors after inflation has been flat over the 5 years since 2006, the public-sector pension plans have artificially increased the wealth of public sector retirees at age 65 by an additional 68 percent since the end of the study. When added to their becoming 11 percent to 18 percent richer by 2006, public employees can expect at age 65 to be 77 percent to 86 percent richer than comparable private-sector workers — nearly twice as rich. Does this really seem fair? ——————————————————————-
On October 15th, former Orange County Treasurer Chriss Street will publish his latest book: “The Third Way.” With conservatives and liberals both disgusted with crony capitalism and failed bureaucracy, the Third Way offers a comprehensive management program to cut the cost of government by 30 percent by increasing public-sector efficiency and effectiveness. If you would like to pre-order a signed copy, contact The Forum Press at: www.theforumpress.com.
Tags: Chriss Street, pensions, Public Employee Unions, stock market, unions Comments(18) |
May 23, 2012
Doesn’t matter. Central Falls RI and Harrisburg PA are the twolatest muni’s to fall. The wheels will come off ALL underwater public pensions in CA in 2-5 years, including CalTURDS. CalSTRS, already underwater by 52%, is asking for state increases right NOW. Good luck with that CalSTRS.
There gonna have to re-write that song to read, “Mommas don’t let your babies grow up to be private sector workers.”
Well Rex, I guarantee you the unions and DemoNcrats will demand the taxpayers make up the shortfall, even if it’s 90%.
I must admit at times feeling envy for those with a CalPers or similar pension based on a large percentage of peak pay, COLA, and “guarantee” my friends retiring from public sector jobs have.
But as time goes on, my emotion is changing to pity. That is because when, not if, the public pension system runs dry; they will not be as prepared as those of us who have had to plan our own future without those perks.
Chriss, very interesting article! In response to end question: no, it absolutely is not fair for public employees to be twice as rich as private-sector workers, especially considering that government workers (in my opinion) are only half as productive/efficient as private sector workers. Does anyone know if the productivity level of public workers versus private sector workers in comparable positions has ever been done? I am curious to see if the statistics match my observations.
A great deal of the extra wealth is associated with the present value of their excessive pensions, 80-90% of which is paid for by TAXPAYER contribution (and the investment earnings thereon).
Hopefully, taxpayers will wise up and renege on about 50% of those promises … to VERY APPROPRIATELY and JUSTIFIABLY level the playing field.
Well Rex, I guarantee you the unions and DemoNcrats will demand the taxpayers make up the shortfall, even if it’s 90%.
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They already tried that in San Diego, failed by a 2-1 margin. Take out the public employees and it failed by a 3-1 margin.
Central Falls RI also tired to raises taxes to fund the million dollar gov pensions, didn’t work. Won’t work here either.
I have known this for years, and used present value calculations at city meetings to no avail. I was verbally attacked by many teachers in parking lots and got nuisance calls at 4 AM from firemen. Even though i am a network engineer for a privately held manufacturer, i was told that i was getting “stock options” and chose “Wall Street” and it was my own fault for my bad choices (I actually make good money- like an assistant principal) but have no security and a decent match for a retirement. It is not easy to take on public school teachers(my kids were in parochial) and beer drinking fire and police men when you are an out of town IT worker.
I am always surprised at the level of dishonesty at CalWatchdog.
The headline here, about an study comparing wealth in retirement of public and private workers, says “How to get rich in CA: Work for govt..”
But here’s the summary of the study offered by its authors: “In short, as a group, couples with state-local workers, all else equal, do not end up richer than couples with private sector careers.” In other words, the Cal Watchdog headline is false.
The authors of the study attribute the higher wealth of full-career public workers largely to forced savings: most of them have defined benefit plans, in which they are required to participate. By contrast, only half of private sector workers are even offered any retirement savings plan, and most of those plans are now defined contribution plans, in which private workers notoriously make poor choices: they save too little, take and spend their balances when they change jobs, and invest unwisely, buying high and selling low. The current private system will leave large numbers of private workers unable to retire.
The pensions and pay of some California public workers are too high, particularly in public safety and local government management. But any disparity between public and private retirement security owes as much to the failure of the private sector as it does to excess on the public side.
“I am always surprised at the level of dishonesty at CalWatchdog.”
And I am alsways surprised at the level of whoppers public trough feeders, like you, spin!
“The authors of the study attribute the higher wealth of full-career public workers largely to forced savings: most of them have defined benefit plans, in which they are required to participate.”
Actually most pay NOTHING, of the FEW that do pay it is less than 5% of the overall costs-that means 95% of the money comes form taxpayers. Nice try. Go read the Little Hoover Commision report, Educate yoruself. That is strike two.
“By contrast, only half of private sector workers are even offered any retirement savings plan, and most of those plans are now defined contribution plans, in which private workers notoriously make poor choices: they save too little, take and spend their balances when they change jobs, and invest unwisely, buying high and selling low.”
ALL private sector employees are subject to the free market-where companies go out of business everyday. They work for several compnaies throughout their lifetime because they have no choice. They cannot put away much because the private sector is paid far less than the trough feeders are. As for investments, it is amazing how you claim all of them made “poor choices”.
“The pensions and pay of some California public workers are too high, particularly in public safety and local government management. But any disparity between public and private retirement security owes as much to the failure of the private sector as it does to excess on the public side.”
ALL gov employees pay far more then the real world.
[Editor's note: This comment referred to an epithet used in a post by Rex the Wonder Dog, which has since been removed from the original post. CalWatchDog.com allows only civil commentary.]
See, Rex. It’s that kind of personal attack that got you banned from the Register and will eventually have places even like the Watchdog going to Facebook comments.
The author should be ashamed for writing articles against public employees–especially when he was one himself. The elite public-entity managers make much more, than the rank and file, but it still can’t be considered rich, when compared to managers and CEO’s of the private corporations. Public employees are not getting rich–they are working to sustain themselves and their families, and to provide services that the public uses every day. The fact that they have decent pension plans should be lauded. Let the private sector take note.
Rex,if you are going to become civil, how about calling it, “CalPERS”.
Cindy, you have time to sit and watch public employees do their job? You should have followed me around, for a day. I hope you get a job of your own, soon.
San Diego will however, thanks to the efforts of Councilmember Carl DeMaio, have on the ballot in 2012, a plan to shift on new city employees to a 401(k) type retirement plan. The ballot proposal was the largest in history, and gathered more than 145,000 signatures.
nowsane, It will be interesting to see,if the courts will allow one group of employees, in the same entity, to receive special priviledges, separate from the other workers, where the pension is concerned. CalPERS does not allow new hires to be placed on DC plans, only, if other employees in the entity are already on a DB plan. Hopefully the other citizens in SD, will become saner, than you appear to be, by the time they cast their votes.
I have no idea whether the San Diego ballot proposal will have enough valid signatures to make the ballot, nor will it will pass, since you know there will be an all-out political effort to stop it by city employees, their families, and their friends.
What I do know is that even DeMaio’s proposal does not include changing the pension system for police officers. Since San Diego is one of the most conservative and Republican leaning large cities in the entire country, that fact alone should be enough to tell anyone paying attention that changing the retirement formula for police officers is simply not in the cards.
Quoting the entre via Pensiontsunami …”Public Employees Can Expect at Age 65 to Be 77-86% Richer Than Workers in the Private Sector ”
Well guess what what … Private Sector taxpayers don’t intend to fund these promised benefits.
Editor: Please look up the meaning of the word “literally”.