Saturday, May 01, 2010

Public Pensions

You are going to hear a lot about pensions, the public ones, in the coming months.  A recent Stanford study estimated that the largest three pension systems in California are underfunded by about half a trillion dollars.   Here are some quick conclusions:

  1. Public pensions are too generous.  The vast majority of employees receive defined contribution plans not defined benefits.  Some advocates for the public systems claim that the pensions compensate for lower wages during employment.   Were that ever true it is no longer the case - public employees on average earn a higher level of compensation than private sector employees.
  2. Public pensions often also include health benefits for life.   The value of those benefits is huge.  Most private sector employers do not offer comparable benefits.
  3. The retirement standards for pensions are lax.   A public employee can retire early, by private sector standards, with a pension that approaches their current compensation.  The systems have also devised provisions like catch up which allows some employees to bring themselves under new pension rules, if they are more generous.   In addition, employees can be granted additional credit for years of service on a wide array of rules.
  4. Don't believe the claims about average pensions.  Some public pension advocates have argued that the average pension for a public employee in California is $29,000.  That may, indeed, be an arithmetic average but the number is silly.  The appropriate comparison is between employees in similar positions.   
We need to be fair to public employees but the scales have been tipped too far in favor of overly generous pension systems which the rest of us can no longer afford.

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