I have been posting and commenting for months that public pensions are the next shoe to drop. That shoe just dropped rather loudly. An article in the New York Times (via Yahoo Finance) stated that there is a $1 Trillion dollar public pension shortfall. This is according to the Pew Center and it follows similar projections from economists at Stanford University and the University of Chicago. Despite repeated denials from PERS and public employee unions, public pensions are in big trouble.
The public pension system was hit by a tsunami of excesses that were easy to predict. Public employees and military personnel often retire at a younger age and and enjoy a longer retirement. Public salaries have risen faster than comparable private employees and this has caused retirees to take home larger pensions. Finally, public sector hiring has exploded the number of employees, putting a huge strain on the pension system.
The guaranteed nature of public pensions creates a huge liability for state governments. Even though some employees have paid into the pension program, their contributions cannot support the total number of retirees and their pensions. This places the states in a precarious position of paying for unfunded pension benefits, at the expense of public services. In an economy where people are losing their jobs and homes and government revenue is down, there is not enough money to subsidize the public pension system.
Fraud & Abuse
Another huge factor in the pension insolvency is the amount of fraud and abuse that occurs. Many public employees are double-dipping on their pensions. They put in twenty years in one agency, quit and switch to another agency and then collect pensions from both. Another sneaky trick that happens with a wink and a nod is that public employees are sometimes given massive overtime in their last year of employment, qualifying them for a much larger pension.
Nothing is more symbolic of abuse than the massive salaries of employees of the City of Bell, CA. The City Manager was receiving $787,637 per year in a city where 20% of the residents live below the poverty level. Even though he has been forced to resign, he will still take home a pension of over $600,000 per year, in addition to Social Security. Even more telling is that the City of Bell illegally overcharged residents nearly $3 Million in property taxes, just to cover their pension liabilities.
Another prime example of abuse is the city of Vernon, CA, which has a total of 32 houses and apartments. Basically, two families own everything in the town and all new building permits are denied. The former mayor was making over $600,000 when he quickly resigned in 2005 and is now taking home an annual pension of just under $500,000. Right now, there are 5,115 retirees in California alone, taking home pensions of over $100,000. And, this number will skyrocket in coming years, as high income employees retire and automatic cost of living raises kick in.
In order to secure the future retirements of hard-working public employees, something drastic has to be done. And, it has to be done quickly. Colorado has already cut its cost of living allowances on pensions to match the rate of inflation, instead of the guaranteed 3.8% that existed previously. California has recently negotiated higher contributions from public employees. I expect other states to quickly follow suit on these types of changes.
My opinion is that public retirees should be limited to a single pension (no double-dipping) and those pensions should have a cap, somewhere well under $100,000. I would much rather see 10 school teachers or fire fighters get a $50,000 pension than one mayor getting $500,000. They will need to change the 80% benefit to somewhere closer to 60%. And, they should calculate the pension amount from an average of the last five years, to prevent employees from end-loading their last year of salary.
The Bottom Line
The bottom line is that a pension was designed to keep the employees from becoming destitute in their old age. It was never expected to become a golden windfall for scheming city managers and crooked politicians.
“Capital formation is shifting from the entrepreneur who invests in the future to the pension trustee who invests in the past”
Peter Drucker – Management Expert
Check out Retirement Pitfalls over at LiveRichley.com.
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