Who wants to be a county-funded millionaire?

Jay Bullock has been trying to defend public employee pensions as "deferred compensation." Here's his point in a nutshell:

The subject is the pay that I'm not getting now that I expect to receive when I retire--in the form of a pension and health benefits. What I want to know is, why is my deferred compensation--which I bargained for and agreed to lower current wages in exchange for--different from Dick Cheney's--which he bargained for and agreed to take lower salary in exchange for?

The problem is the assumption that these pensions were agreed to "in exchange for" higher wages. The resources devoted to these pensions could never have been paid out in current wages because the public would have known what was happening.

Take an example used in a recent story in the Journal-Sentinel. A court clerk retired at 59 at an income of $36,000. This person retired prior to the 2000 enhancements, but still has a lifetime pension of $26,000 and free health insurance for life. The health insurance is hard to value because it could well be impossible for her to buy it in the public sector. Milwaukee County pays something like 132 million dollars for health care for approximately 10,650 people (most of whom are retired!) That's another 12,400/year.

But that doesn't capture the cost since it is elderly folks who contribute to the lion's share of health costs. If the 60% of the county's insureds weren't retired, its per capita costs would go down as well. If the cost of providing this insurance to our retiree is as little as 25% over the average, it is costing the county $16500 per year and she is, in effect, receiving a pension of $42500.

Private employers are increasingly going to defined contribution plans. When you retire, you are entitled to whatever is in an account to which you and your employer contributed. What kind of account would it cost to get lifetime income of $42,500?

If you bought an annuity, this would cost you about
$630,000. But even that understates the value of the county benefits because, while the annuity income is fixed, the amount of the county pension will increase over time.

How many people work for 33 years and never earn more than $36,000 and retire with a nest egg of $630,000?

But it gets worse. Had she hung on for just a but longer, she would have been eligible for the backdrop payment. In her case, it would have been $ 350,000. So what the county was saying is that, you can work for the taxpayers at a low-level position, and retire before 60 - as a millionaire.

How much extra income would it have taken to save all that money. You'd have to assume a modest rate of return since the pension was never at risk. If you assume that her average salary over the years was $ 24000/month, 10% more at a 5% rate of return and an average tax rate of 25% would leave her with about $ 117000. Bump the rate of return to 8% and she'd have $150000. If you assume 20% more and a rate of return of 8%, you get her to around $372,000. If you assume 20% more salary and a 10% rate of return, you get closer - about $517,000. To get her there, you need about a 25% raise and a 10% return. But how likely is that? How much more than $36,000 would you expect a court clerk to make in 1999? I can tell you that a legal secretary with equivalent experience wouldn't have made much, if any, more.


As for the backdrop, there is just no way.

And before you tell me that a defined contribution account can be passed on to her heirs and a county pension cannot, I equalized all that by annuitizing the money. If you want to follow conservative guidelines for withdrawal from a retirement fund, she'd need about a million dollars to support the $42,500.

Update: When I initially did this, I failed to apply the tax rate to her return. I also appreciate that I have done this in a back of the envelope manner, but you get the point.