PUBLIC VS PRIVATE RETIREMENTS
The data, however, tells a different story. According to the Census Bureau, the average New York retiree receiving a corporate or union pension — a retiree from the private sector — was receiving an annual benefit of $13,100 in 2009. For state and local government retirees, that figure was more than twice as high: $27,600. And that average figure includes retirees who were part-time workers or only spent part of their careers in government; full-career retirees often do far better.
To understand what sort of public pension you might be eligible for, the Empire Center for New York State Policy has created a Pension Calculator, available at nypensionbomb.org. Simply enter your age at retirement, years worked and final average salary — typically, the average of your wage earnings in your last three years worked — and you can see what benefit you would be entitled to, if you were lucky enough to work for the government.
You can also find out that pension’s present value — how much cash you would need on hand to buy an annuity making payments equal to the pension. But sit down before you read it — in many cases, that’s an amount well into the seven figures.
What the calculator will show you is that New York pension benefits can be extremely rich for typical employees. Consider a teacher in Albany County, retiring at 59 after a 37-year career, with a final average salary of $89,000. That teacher is eligible for a pension benefit starting at $62,745 (70.5% of final average salary) with an annual cost-of-living adjustment.
Is your 401(k) as rich as that? Consider that a private-sector worker seeking an equivalent annuity would need a whopping $1.25 million on hand at retirement to buy it.
The richness of benefits is even more astounding in some downstate communities. A Yonkers teacher with a master’s degree and some additional coursework could expect a final average salary just over $110,000 after 37 years worked. That translates into an annual pension of $78,255 — exempt from state and local income tax — with a present value of more than $1.5 million, assuming retirement at 59. Police and firefighters, famously, get to retire earlier with even more generous benefits.
These calculations don’t include the value of retiree health-care benefits. While health benefits for retirees are nearly unheard of in the private sector, New York public employees may keep their same health insurance in retirement nearly for free — or absolutely for free in many cases, as workers can use accumulated sick time to pay their share of the premiums. This is a benefit worth approximately $14,000 per year for family coverage.
And the benefit doesn’t stop at 65. Once retirees become eligible for Medicare, taxpayers generously pick up their Medicare Part B premiums and pay for high-quality Medigap coverage.
These benefits are almost entirely funded by taxpayers. Public employees in New York state do make pension contributions of 3% of their salary, but only for their first 10 years of work.
Last year’s “Tier V” pension reform will force most new employees to make 3% contributions throughout their careers — maybe. The state enacted a similar reform in the 1980s, and then undid it at the unions’ behest when the stock market performed well.
So, how do private sector retirement benefits look in comparison? Even if you’re one of the lucky few private-sector workers who gets a defined benefit pension (just 16% of workers in private industry do, as of 2009) your benefit is likely about half as generous as a government worker’s. And in New York, you must pay state and local income tax on pensions over $20,000, while public workers are entirely exempt.
The vast majority of private sector workers receive their retirement benefits in the form of a defined contribution plan, such as a 401(k) with employer match. These benefits are, on average, significantly less generous than the pensions provided to government workers.
The average American private sector worker receives 99 cents per hour worked in retirement benefits, mostly in the form of an employer-paid 401(k) contribution. The average state and local government worker gets $3.26, mostly in the form of pension benefits, according to the Bureau of Labor Statistics. But those figures actually understate the public-private gap.
You may have read that public pension plans use rosy accounting rules that understate the size of their true liabilities. These same rules also understate the value of benefits accrued by workers. One study from the American Enterprise Institute found that, in the case of California workers, official estimates understated the value of pensions by nearly half — that is, California workers receive pension benefits worth 16% of their salaries, not the official 8.2%.
So, the average government worker is receiving retirement benefits several times richer than his or her counterparts in the private sector. This fact — not abusive practices like “pension spiking” and “double-dipping” — is the reason that public pension costs have become unsustainable.
Over the next five years, state and local governments’ payments to New York state pension systems will nearly triple. For school districts, they will more than quadruple, driving an 18% increase in school property taxes just to pay for rising pension costs. New York City has already seen this explosion — pension costs have grown tenfold in the last decade — and pension costs in the city will continue to rise going forward.
State lawmakers will only get a handle on this problem when they admit that public employee pensions have not simply been mismanaged and abused. The root driver of exploding costs is legislators’ willingness to make unsustainable promises to be paid by future taxpayers — a proclivity as fundamental to a legislator’s brain as the will to breathe is to yours or mine.
The only way to protect New York taxpayers is to make it impossible for the legislature to give away the farm. That will require abandoning the defined benefit model and adopting 401(k) — and bringing the value of public sector retirement benefits closer into line with the private sector”.
Josh Barro is the Walter B. Wriston Fellow at the Manhattan Institute, where E.J. McMahon is a Senior Fellow.