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Health & Fitness

What is a Fair Public Pension? Here Are Some Thoughts

A fair system must eliminate the pension spiking that allows some public sector employees to enjoy pensions much greater than what was intended and specified by the system.

Over the past couple of years, much has been written and said about the staggering increase in the cost of public sector pensions. While there is considerable debate about how to deal with the pension costs, there is little doubt that we have a problem — a big one. In order to support public sector pensions, worthwhile programs have been reduced and eliminated; taxes have been raised; and some pension reforms have been made — although they are mostly tepid.

There remains a big gap between pension benefits that have been agreed to and money available to pay for them.

Although much less discussed than affordability, an equally important aspect of the pension issue is determining what is a "fair" public sector pension. Public sector employees deserve fair pensions, even if it means increasing taxes to provide them. Conversely, taxpayer dollars should not be spent to support pensions in excess of what is fair, even if taxes are adequate to do so.

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The Little Hoover Commission, in its recently released report on pensions in California, observed: " Today's benefit structure for public employees is unrecognizable from the design, funding structure and goals of the original 1932 version. Instead of retirement security, the public pension became a wealth generator." The Commission hit the nail on the head.

The primary factor that has strained our pension systems is that as our life expectancy steadily increased, pension systems throughout our state have decreased the age for retirement, while promising ever more generous benefits. Social Security, when it started in the mid 1930s, established 65 as a retirement age. That age was increased to 67 and there is credible talk about increasing it further.

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California's retirement system also started out with 65 as a retirement age — but it has moved in the opposite direction. Right now most "Safety" workers can draw full pensions at 50 and many non-Safety workers can do the same at 55.

Many in the private sector would also like to spend a good part of their healthy years in retirement; to travel the world; to own a second home; to have a nice legacy to leave to their children. All of those things are desirable, but it isn't up to the taxpayer to provide them for public sector workers. After all, many private sector taxpayers, who bear the cost of public sector pensions, are finding it difficult to provide "retirement security" for themselves.

So what would a fair and affordable system look like?

Using "retirement security" — maintaining ones pre-retirement lifestyle into retirement — as a basis, the answer might be reasoned something like this: One can certainly manage in retirement with less than what was needed during the working years. It is no longer necessary to save the 15% or so of salary that Social Security and other retirement savings often amount to.

Other reductions in living costs vary but often include: kids raised and out of the house, homes paid for, reduced costs of getting to work, maintaining a work wardrobe, and more time to do things that were paid for during working years. Financial planners will tell you that somewhere between 75 and 80 percent of pre-retirement earnings is a very reasonable retirement target. 

Second, it is critical to define how long a working career is — how long one should expect to work to earn a full pension. A later retirement age makes the annual burden of saving for retirement much more bearable. In this day and age when 60 is the new 50, and life expectancies for 65 year olds are well into the 80's, it hardly seems reasonable to provide a full pension earlier than age 65.

Third, a government agency should provide a full pension only for employees who have worked a full career. Thus the annual multiplier (credit for retirement) should be based on working 40-45 years.

Fourth, just as is the case with Social Security, employees should share the cost of the system with employers. Even after so much discussion of pension costs, some public agencies, particularly water districts, continue to require ratepayers to pick up the employee portion of pension costs (in addition to the much higher employer portion).

Finally, a fair system must eliminate the pension spiking that allows some public sector employees to enjoy pensions much greater than what was intended and specified by the system.

Given those parameters: 75% of income, retirement age of 65, working 40 - 45 years, cost sharing, and elimination of spiking, it is easy to do the math to find out how much credit should be granted for each year worked and what the cost will be. Such a program would be affordable and fair to both taxpayers and retirees. It would allow us to stop the seemingly endless reduction in funding for worthwhile and progressive programs.

Unfortunately, the promises made to our public sector workers, by almost every agency and at every level in our State, far exceed the parameters of fairness discussed above. That is why we can't balance our budget and that is what must change. 

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