Parsing the Pension Talking Points
The state Senate approved a pension reform package yesterday. Reviewing the Senate’s debate, there are two oft-repeated claims from reform opponents that are worth parsing:
Claim 1: State employees pay for their own pension.
Reality: This will be true only for some new employees and only if a number of assumptions hold up over time. Those assumptions include existing rates of salary increase and service time duration.
The assumption with the biggest potential downside risk is the continued achievement of the 8.25 percent expected rate of return for the state pension fund over the career of these new employees. There is a considerable school of thought, within academia and the investment community, that the return environment will be lower in the future. If we fail to meet the expected rate of return, the taxpayer will make up the difference.
Also, the qualifier “some new” employees is crucial. The claim only applies to Group 1 employees, who make up about 80 percent of the workforce. Groups 2, 3, and 4 have more generous pension packages that are not close to self-funding. In addition, the claim only applies to new employees as many long-serving employees were grand-fathered in at much lower rates than current employees.
Claim 2: This is usually a hypothetical about a long-serving state employee retiring with a tiny pension. In this debate, the example provided was a 60-year-old state worker retiring with 34 years of service at $50k salary receiving a $26,350 pension.
Reality: While this scenario is technically correct, it is starkly different from reality (all data as of 2009, see here for more). The average retired employee with 30-34 years of service receives a pension of $39,135. Those who retired in 2009 with the same level of service time retired with a pension of $49,339. The reality is that the current long-serving employee makes more significantly more than $50,000.
The key part of the hypothetical is the selection of 60 as the retirement age. The intent of the legislation is to more closely align retirement ages with the extended life expectancy of the population. Right now, the average state pensioner retires at a bit more than 60 years of age. The legislation moves to reward those employees retiring at ages more consistent with Social Security norms. So, choosing to retire at 60 will now provide a significantly lower pension than retiring at a later age — that’s the point.
There is plenty of rhetoric out there about state pensions, and plenty of talking points and anecdotes. Stick with the data to get the full story.
Cross-posted at Pioneer Institute’s blog.