Public Pensions: Arithmetic Please

Print
Saturday, 12 March 2011 09:38

It's so fashionable these days to beat up on public sector pensions that the rules of arithmetic no longer appear to pose a binding constraint. The New York Times concluded an article complaining about the cost of state pension with a quote from Sylvestor Scheiber, one of the pension analysts advocating cuts in public pensions:

"By the time the typical private-sector worker has retired, the teachers, the highway patrolmen and these folks have already gotten $200,000, $300,000, $400,000 in pensions.”

The comment refers to the fact that many state workers can receive full pension benefits while still in their 50s. The immediate point of reference is Wisconsin, where it tells us that police and firefighters can retire at age 53 if they have 25 years of service, while other workers can retire at age 57 if they have 30 years of service.

The article does not tell us what percent of state employees actually retire at these ages. It is likely that most state employees don't have 30 years of service by the time they reach age 57, so they would have to work longer to receive their full pension benefit. However, even if we do assume that an employee other than a police officer or a firefighter (i.e. the "teachers and these folks") retires at a relatively early age, they will not get the $200,000, $300,000, $400,000 in pension benefits that Mr. Scheiber touts.

According to the article, the average pension for public employees in Wisconsin is $26,000. (Many public employees do not get Social Security, so their pension is likely to be the vast majority of their retirement income.) Most workers start taking their Social Security benefits before they reach age 63, which creates a gap of less than 6 years between the lowest age at which most Wisconsin public employees can draw their benefits and the age at which most private sector workers have retired.

If we multiple 6 times the average annual pension of $26,000 we get $156,000, as the amount of benefits that public sector workers can receive before private sector workers typically retire. This is considerably less than the $200,000, $300,000,  $400,000 numbers tossed out by Mr. Scheiber. And this would only apply to a worker who had 30 years of employment with the state by the time they reached age 57. A worker that first started working for the government at age 30 would have to wait until age 60 to retire with a full pension in Wisconsin, giving them less than three years of additional benefits.

It is also important to note that public sector workers pay for these benefits with lower wages than their private sector counterparts. Including all benefits, public sector workers still receive slightly lower compensation than their private sector counterparts after controlling for education and experience. This picture would be little changed even if the calculations of public sector compensation were adjusted upward by increasing the pension contribution 20-25 percent to account for the current underfunding of pensions.