This story by Timm Herdt appeared Aug. 24, 2010 in the Ventura County Star.
Here’s a little piece of information that will probably surprise you if all you know about public employee pensions is what you’ve picked up from recent political rhetoric: Among the 492,000 retired government workers receiving checks from the state’s Public Employees’ Retirement System, the average monthly benefit is $2,188, and 78 percent receive $3,000 a month or less.
And here’s more little-known information that somehow has been absent from the political dialogue: Among all workers, the percentage covered by pensions has fallen by half over the last 30 years, to 20 percent.
During the same period, of course, there was a concurrent increase in the percentage of workers covered by 401(k) and other defined-contribution retirement plans.
For the majority of workers, the end result has been negative. “The decline in defined-benefit benefits is greater than the increase in income from defined-contribution accounts,” the Social Security Administration concluded in a recent study.
In a 2007 study — before a stock market crash stripped most 401(k) accounts of 20 percent to 30 percent of their value — the Congressional Research Service determined that the median retirement account balance of households headed by individuals ages 55-64 was $100,000. If converted to an annuity upon retirement, that would produce a monthly income of about $700.
Bottom line: Since even a very modest pension (1 percent of salary times years of service) would have produced a $1,250 per month benefit for a $50,000-a-year worker after 30 years of service, workers would have been much better off with a pension than with a 401(k).
But even those with 401(k)’s are in a privileged group. An estimated 43 percent of California workers are employed in jobs that offer no retirement benefits at all. That being the case, about 40 percent of today’s about-to-retire baby boomers will have to rely on Social Security checks, which average $1,081 a month in California, for more than 90 percent of their retirement incomes.
“I think we have a looming retirement crisis in the United States,” says Sanford Jacoby, a professor of management and public policy at UCLA’s Anderson School of Management. “The writing is on the wall. And since the financial crisis, things have gone from bad to worse.”
I spoke with Jacoby this week after reading an Op-Ed essay of his published last week in the Sacramento Bee. In it, he challenged the argument that “overly generous benefits negotiated by the state’s public employee unions” are the cause of California’s budget problems.
He noted that California’s public pension fund is better positioned to meet its obligations than those in most other states, that among the states in the worst shape are those with very low public-sector unionization rates, and that the stock market crash in 2009 “walloped” all pension funds.
Jacoby expressed support for some common-sense changes in public pensions, such as closing loopholes that allow some people to collect more than 90 percent of their pre-retirement wages, limiting multiple pensions and forbidding public agencies from taking a contribution holiday during good times, as California did during the stock market bubble.
But most important, he wrote, is that Californians focus on the bigger picture of retirement security.
“People look at public employees and there is a certain amount of envy,” he told me. “There are folks out there stoking the fires of envy, hoping to fuel the politics of resentment. It’s not going to solve the wider problem.”
While there are things that public agencies and their unions can and should do to curb too-lavish pensions for top managers and high-wage workers, it makes no sense for the public to begrudge the $2,200-a-month pensions of retired school bus drivers, DMV clerks and city maintenance workers.
The massive move away from guaranteed benefits in favor of individual investment accounts has been a boon to Wall Street, but a bust for most private-sector workers.
A large-scale return to private-sector pensions is not only unlikely, but also unwise, given that they can’t be transferred from job to job in today’s mobile and fast-changing workplace.
It’s time to think about a third way, such as mandatory retirement accounts run by Social Security that would guarantee a modest investment return.
For the generation of workers over 40 or 45, it may already be too late.
“One of the things that motivated Social Security is that in those days there was considerable indigence among the elderly. That was a serious problem,” Jacoby said. “Today, many people have no savings, or very small savings, and no pension. In some ways, it’s a little bit of back to the future.”
Timm Herdt is chief of The Star state bureau.