The Government Worker Retirement Spree
Now that states and cities are requiring workers to contribute more to their health and pension costs and work longer before retiring, government employees are rushing to the door, according to press reports. That's not surprising, but it's also not quite as unusual as the press would have us believe.
Thanks to rich benefits, early retirement options and longer lifespans, the number of government workers collecting pensions was soaring for years even before states enacted pension reforms. Those swelling retiree rolls helped to create the pension funding shortfalls that governments are grappling with. You can't talk about the retirement spree happening now without understanding the other one that's been going on for a decade.
From 2001 through 2010, the number of government workers or their beneficiaries receiving pensions from state and municipal funds soared by 2.3 million, or 38 percent, to 8.25 million. During that time, total government workers active in pension funds increased by just 5 percent. As a result, the ratio of public employees still working to those retired fell by a full half worker during the decade, from 2.3 to 1.8. The outflow of money from funds soared, doubling from $100 billion paid to beneficiaries in 2001 to $200 billion in 2010 (the latest year comprehensive statistics are available).
Most of this happened before states and cities enacted even the mild pension reform of the last few years. Driving the swelling beneficiary rolls were enhancements to pensions largely enacted in the 1990s that made early retirement more attractive. Places changed their formulas for calculating pensions, providing workers with retirement income that approximated their actual salaries. Governments added health-care-for-life as a benefit, making early retirement all the more possible.
In California, for instance, a more generous pension multiplier for state and local workers meant that many public safety workers could retire around the age of 50 with as much as 90 percent of their final salary as a pension, plus cost of living adjustments every year in retirement and free health care. If you could make virtually your entire current salary as a pension and share in raises that actual workers were getting every year, why would you keep working?
Many government workers decided that early retirement was the thing. That's one reason why, according to the Bureau of Labor Statistics, the average age that a public school teacher retired at in 2006, in the midst of this retirement spree, was 58 years old.
If our government pension systems were well funded, these swelling beneficiary rolls would not be a problem. A pension system is not like Social Security, a pay-as-you-go plan where today's workers finance payments to retirees. Instead, governments were supposed to have set aside the money to pay for today's retirees. But our politicians made promises to workers that were unrealistic. In some cases, as in Stockton, the bankrupt California city, no one even bothered to calculate the cost of these promises when they were made, simply assuming instead that the next generation of political leaders would find a way to pay them when they came due.
In places like New Jersey, on the other hand, politicians simply hid the true cost of these pension enhancements from the public ,as the Securities and Exchange Commission documented when it cited the state for filing misleading statements about the funding levels of its pension funds several years ago.
Since we haven't set aside enough money to fund these beneficiaries, the massive outflows of funds are troubling. In 2001, governments and workers contributed $65 billion toward pensions while $112 billion went out the door, counting not only payments to beneficiaries but other kinds of withdrawals too. In 2010, workers and government contributed $125 billion to the funds, thanks largely to a sharp increase in contributions from governments (that is, taxpayers), but $213 billion exited the funds.
Pension funds were supposed to make up the difference through investment returns, though they projected returns that would have made Bernie Madoff blush. The good years in the market have been somewhat offset by some truly miserable ones, like 2008 and 2009, when our government pension investment managers collectively lost an astounding $690 billion. One result is that our pension funds ended 2011 with about $2.64 trillion in assets, compared with $2.16 trillion in 2001.
If your think it's comforting that pension assets increased at all, remember that some 14 million workers in these pension funds have been accumulating their own retirement benefits throughout the decade, and they will demand them at some point. The money now in funds is only half of what's been promised, according to a recent analysis of pension funds by the Center for Retirement Research at Boston College, which applied a somewhat more conservative investment return rate than that employed by our pension funds.
That bad news just continues. Earlier this week CalPERS, the massive California pension fund that holds nearly 10 percent of all U.S. state and local pension assets, reported a dismal 1 percent investment return for 2011. If other government pension funds performed similarly, then 2011 represented another year of net outflow of funds from state and local pension systems, and the goal of financing our enormous government worker retirement liability grew further away, not closer.
Press reports noted that CalPERS performance puts increased pressure on California municipalities and state government to make up the difference. But our local governments are already underfunding pensions. Recently, a study by the Pew Center for the States found that fewer than 20 states made their full annual required pension contribution, based on states' own estimates of what they should be paying. When you calculate pension payments based on a more conservative rate of return, the situation is much worse. No state is contributing as much to its pension as it should.
Yes, there is a worker retirement spree going on. It has been taking place for more than a decade and its driving force is not pension reform but rich benefits which allowed an entire cohort of workers who came of age in the first decade of this century to head for the doors early. We're now paying for that retirement spree, and the latest numbers suggest we haven't yet made a very good start in paying it off.