By Kathy Kristof The Fiscal Times
Many Americans are worried about funding retirement. Not Bernard Parks. The
former Los Angeles police chief retired at age 59 with a pension that paid 90 percent of his final years earnings a tidy $265000 annually. And then like millions of former public employees who retire young he was able to pick up another job while still collecting that rich pension.
A year after his official retirement Parks became a Los Angeles City Councilman earning $179000 annually. Together his pension and pay net him some $444000 roughly $44000 more than the annual earnings of President Barack Obama and considerably more than Parks pre-retirement pay.
Rich retirement payments to government workers have long been a source of pension envy" but payments for people like Parks are now a topic of heated national debate because public retirement funds are fast running out of cash. A recent analysis by
Joshua D. Rauh professor of finance at Northwestern Universitys Kellogg School of Management found that public pensions in four states Illinois Connecticut Indiana and New Jersey could
run out of money this decade if nothing is done. Another 23 systems are slated to go belly up before 2029 according to Rauh. As taxpayers struggle with layoffs stagnant wages and frozen" benefits theyre becoming increasingly disenchanted with the seemingly sacrosanct employment and benefit prospects in the public sector leading some to predict a coming
war between public and private sector workers.
While Rauhs study has its detractors the National Association of State Retirement Administrators disputes some of his assumptions everyone agrees that pension funds operated by state and city governments are rapidly running short of the cash needed to fund their promises.
What happens then? If the systems arent revamped the pensions will eat up an increasing portion of state and municipal budgets laying waste to parks libraries roads and other public services as well as working cops firefighters and other current employees. Need to fill potholes and keep cops on the beat? Taxpayers would have to shoulder the burden with higher annual levies.
We are on the precipice of a disaster" said
Marcia Wagner founder of the Wagner Law Group a Boston-based employee benefits law firm. We have massive underfunding that will take up more and more of state budgets squeezing other things out."
In Ohio where Rauh estimates the public retirement systems will run out of cash in 2030 and require 52 percent of state revenues to fund benefits teachers commonly retire and rehire." Just recently for example Kettering school district superintendent James Schoenlein said he wanted to retire and return to his old position at a lower annual salary. On the surface the deal would cut the Kettering school districts payroll paying Schoenlein just $130000 instead of more than $155000. But add that to his retirement pay which amounts to 90 percent of the average of his highest three-years pay and Schoenlein will take home more than $250000 according to the
Dayton Daily News.
A dozen state pensions have moved to stave off bankruptcy by boosting contributions required of existing workers and by cutting some future benefit accruals. But most state systems have done nothingand even some of those that have acted may not have done enough.
Public pensions unlike pensions provided in private industry often allow payment of benefits after a set number of years of service regardless of your age. As a result an individual could go to work for a public entity when he was 20 vest" in his pension benefits by age 40 and then retire" collecting payments for the next 40 or 50 years.
Those are promises that are impossible to sustain unless the population and the economy are growing at a break-neck pace" said
Peter Morici former chief economist for the U.S. International Trade Commission. You dont have to have a PhD in finance to realize that you cant give people 90 percent pensions at the age of fifty and not have the system go bust after a few years."
Public workers commonly get a generous 1.8 percent of wages for each year theyve worked if theyre also covered by Social Security said
Keith Brainard research director for the National Association of State Retirement Administrators. Those who dont participate in Social Security such as many teachers and public safety workers get considerably more often 2 to 3 of pay for each year worked. Someone who started work fresh out of college could get 50 or 60 percent of their pay at age 42 and be able to collect that pension for life regardless of whether or not they took another job and continued working. In New York the hot tip is to work 20 years for one public agency; quit and get a job for another public agency for the next 20 years said Morici. Then after 40 years of work you have two pensions that deliver 100 percent of your working wages.
In private industry where only about one-fifth of workers get a defined benefit pension payments dramatically less generous. Typically employees get just 1.25 percent of wages for each year they worked and theyre unable to claim any pension until after they hit the age of 65.
Other differences: Some public pensions give you a multiple of your highest" years pay even if that year was boosted by overtime others only factor in final" pay and wink at those who spike" it by allowing significant raises to be granted to people who are on the brink of retirement said Wagner. In addition public pensions are frequently adjusted each year to account for higher costs. Unlike Social Security which is adjusted for inflation public employee pensions are often adjusted by a set amount say 3 percent per year. Pensioners receive that increase even when the economy is bad enough to create declining prices.
A recent
New York Times investigation found that 100 retired police and fire fighters in Yonkers were making more retired than they did working. Why? They spiked" their pensions by loading up on overtime in the years before retirement. Hugo Tassone a 44-year old pensioner told The New York Times that he merely took advantage of what the system allowed. The result: He took home $74000 annually when employed but gets $101 333 retired.
A federal law called ERISA does not allow companies to pull pensions that have already been earned. As a result many companies told workers that they would not be able to accrue new benefits and new workers coming in wouldnt get a traditional pension theyd have to save by personally contributing to 401(k) plans.
State and municipal governments are not regulated by federal law. Instead their pension rules are set by state charters and constitutions that often say that new workers cant be denied the pensions promised to existing workers says Wagner. But these charters can be changed at will. The problem: Theres little will to do it since unions wield considerable political clout.
Adds Morici: When you look at the grip of the unionized interests on state governments it is just impossible for the pensions not to fail and the governments to fail with it. Yet some progress has been made. Kansas for example made sweeping changes to its public employee plans boosting employee contributions changing benefit formulas and boosting age and service requirements to encourage people to wait until age 65 to retire. In California where the states budget deficit exceeds $19 billion four public employee unions agreed to a raft of changes that hike employee contributions and raise the retirement age for newcomers. And revisions are in the offing in several additional states which could help preserve the pensions without tapping taxpayers to do it.
Thats the kind of change thats needed around the country Wagner said.
