The Millionaire Cop Next Door
forbes.com
forbes.com
The fair cash value of the pension is closer to $1 million. (Please accept this as a handwavy approximation as I'm on a train -- you can probably find any number of calculators on the Internet which would give you a more exact calculation.)
Early Retirement, Average Lifespan: $1 million
Early Retirement, Long Lifespan: $1.5 million
Average Retirement, Long Lifespan: $1.25 million
Average Retirement, Average Lifespan: $650,000
Early Retirement, Short Lifespan: $480,000
The 4% was not defined as real return, maybe it was supposed to be - but otherwise you need to account for the inflation linkage of the annuity.
With that basis you get $1.4m with no inflation and almost exactly $2m with an inflation assumption of 2%.
People massively undervalue pensions - especially those with additional benefits such as spousal, early retirement, minimum payment periods etc.
The only valid valuation for any asset remains what it would cost in the market, and as such $2m is the correct value. It is entirely possible you'd rather have the cash, but it's not objectively superior.
This product has a negotiable price tag. You will find quotes for this product to be approximately $1 million, not $2 million.
[Edit: P.S. Most HN users should not buy annuities. Ask me, or a fee-only financial adviser, later if you want to know why, but the short version is "They optimize for emotions but you have the compelling alternative to optimize using math."]
The annuity market is in no way optimised for emotion. It is priced based on capital retirements, mortality numbers, longevity trends, investment returns, bond yields, and a bunch of other things - before you even get to the insurer then trying to be competitive in the market. You are buying insurance. Same as medical insurance, plenty of people get less than they pay in - that's the whole point. Risk pooling means redistribution of wealth, always.
If you want to run the numbers on drawdown and argue it's better than annuitisation, feel free. Just make sure you price in your 40% drop in equities scenario.
If you go to http://www.immediateannuities.com/ and say you're a 50-year old man (the age at which at least in some CA cities a police/fire municipal worker can retire with 90% pension), with a 40-year old wife, and you invest $2 million, you'll get an immediate income annuity of $88,560 a year.
That's in the ballpark of what the Forbes article was saying ($80,000 a year). The numbers don't change that much if the age of the wife approaches 50.
So <ntrails> has the better of the argument, I think: There's no evidence you can buy an $80K annuity for $1M. And I suspect it would cost even more if it were indexed for inflation, as many municipal pension benefits are.
Second, the surviving spouse can get the pension benefits, which again raises the effective value. Cite: http://online.wsj.com/news/articles/SB1000142405274870362530...
Third, pension benefits are often indexed for inflation.
Clearly the pension-maximizing approach is for a 50-year retiree to marry a 20-year old. :)
Their work provide a valuable and concrete service to the community. I think startup enthusiasts on the other hand are kind of like starting a band, providing entertainment/art for an audience and for the performer to satisfy an itch. Life is a finite thing which makes our chosen paths speak for our individual/subjective values. We shouldn't be green about other people's financial or personal success, but should of focus on ourselves and embrace the rewards and consequences our choices make.
I think that's what makes a Computer Programmer so exciting. You can either choose to work for a startup and be a rock star or you can choose to work to work at a regular company or gov't with good life balance and benefits; and/or save your money and good planning to retire at mid-50's.
I must admit, sometimes it does feel like I didn't have the choice and have been dealt with a bad hand. But I think how lucky I'm to be in US where I can eat really delicious taco's, watch free TV shows/movies and chillax with peeps and other things I enjoy without being rich.
Ofc, there's a lot of social pressure to earn more for your family and for yourself, but I think relationships in general should focus on empowering the other person than imposing with money, expectations or guilt. And being upset with what other peeps make is just my own projections of my own insecurities.
If the state and cities are going bankrupt then why did they enter the contract in the first place? What was the economic planning they did which let them conclude - apparently falsely - that they would be able to keep their side of the bargain, and how has it broken down?
Personally, I believe it's a combination of continued pressure to lower taxes and continued pressure to outsource government work to more expensive private businesses, especially when tied to the philosophical idea that the government should be small enough to 'drown it in the bathtub.'
In other words, another solution to not going bankrupt is to raise taxes, rather than breaking existing contracts.
Taken to its logical conclusion if there was a miracle pill that added 50 years to every lifespan the annuity system would implode.
Yet people, being people, don't like to accept that things have changed. They stick to talk of contracts (where it is only accrued, previous years that are contractually earned) without seeing the upside.
Basically you can have this pension and die at 70 or a less generous one and live until 80.
For example, http://en.wikipedia.org/wiki/File:Life_Expectancy_at_Birth_b... shows a pretty linear growth.
Assuming retirement at about age 60, http://www.infoplease.com/ipa/A0005140.html says white males in the 1950s had 16 years of life expectancy, and it's 22 years now. Not only is the trend increasing at a relatively constant rate, but living "longer post retirement than you spent working in these kind of jobs" appears to be relatively uncommon. Most people spend about 40-45 years working, and about 1/2 that more on pension.
Unless you can point to some really firm numbers, I think you are incorrectly underestimating the expertise of the actuaries of decades ago.
Keep in mind that the politicians who put these bargains in place are long gone. And the politicians who later didn't fund the pension funds adequately are also long gone. None of them have to deal with the aftermath of their choices (and indeed one of the side-effects of the push for term limits over the last 30 years is that it's now guaranteed that politicians will not have to deal with the long-term consequences of their actions).
It's been my observation that many voters have strong opinions on what government expenditures should cost. Opinions that are driven by their gut, and not by any sort of market-based reality. But politicians have to satisfy both the market and the voters. If the market demands that the salary for a position be X, while voters think it should be X*0.85, then one way for politicians to deal with it is to defer the remaining 15%. They may convince themselves that it will work, or they may not care, but regardless, it's no longer their problem.
Ha-ha. Sad laughter. Some police officers contribute immensely to the society. Others, and many of them, take from society to satisfy their personal sociopathic, power-hungry tendencies. Blue wall of silence exists for concrete reasons: corruption in the police force.
So I don't think its great that senior police officers who may or may not covered the crimes done by their colleagues are rewarded by six figure pensions.
That would be great and all if the money to pay for these things wasn't being taken out of your unborn children's unearned earnings. Eventually it'll pop, and all the good we gained by paying "public servants" big pensions will vanish as the rest of society crumbles paying untold debts that they never had a decision in.
In the San Francisco bay area we have this nearby example:
http://online.wsj.com/news/articles/SB1000142405274870362530... "The study also found that lavish pay and benefit packages were a root cause of the city's problems. In Vallejo compensation packages for police captains top $300,000 a year and average $171,000 a year for firefighters. Regular public employees in the city can retire at age 55 with 81% of their final year's pay guaranteed. Police and fire officials can retire at age 50 with a pension that pays them 90% of their final year's salary every year for life and the lives of their spouses."
And another example in California, where residents may be required to pay more in taxes (it's already the highest-taxed state) because of political mismanagement and ballooning pension benefits:
http://online.wsj.com/news/articles/SB1000142405270230481500... "Yet government pension costs are soaring as the bills that politicians postponed during the hard economic times come due. No less than Warren Buffett warned this week that "local and state financial problems are accelerating, in large part because public entities promised pensions they couldn't afford." .. Calpers also voted last month to dun state taxpayers for an additional $1.2 billion a year. And lo, the state Legislative Analyst's Office says that California State Teachers' Retirement System (Calstrs) says it needs $5.3 billion to $5.7 billion more annually by 2020 to pay down its $71 billion shortfall. That's more than California spends on the University of California and Cal State colleges."
What isn't illegal, and what is what is usually called "spiking", is people changing their preferences in terms of what they will apply for that they are qualified for, or what they will accept in terms of overtime requirements in a position, based on proximity to retirement. With retirement programs that are based on last-years salary, this can produce an outsize reward, which is what reforms are intended to address.
And the closest argument to the one you present I've seen -- and I've spent a lot of time in and around state government and public worker issues -- isn't that its "ingrained in cultural mores and expectations", but that changing the terms for current workers (not future workers) is not acceptable because the terms of the retirement program are part of the deal they accepted when they started working, and in which they have a -- legally enforceable under federal law -- property interest, so that it would be outright illegal to change the terms (which is exactly the reason that the change to the three-year rule only worked for new hires.)
http://paloaltofreepress.com/palo-alto-city-employees-to-rea...
"The city’s pension contribution for police managers will be $59,903 on average, according to the proposed budget. Police officers pensions are the next most expensive, costing $42,688 each, followed by firefighters pensions at an annual average cost of $42,289, and fire chiefs pensions at $41,828."
This 40K+/year contribution is what allows to pay those 200K+/year pensions.
(Also I don't approve of the fact that comments on the article itself are disabled, sidenote.)
It depends on what you do. A secretary will make far less than the chief of police but they both happen to be government workers....how is that not obvious..?
Please can you explain to me, honestly. Why would someone that has children or plans to willingly choose to take a pay cut in exchange for a big pension fund? Sounds very selfish, because it implies that these people want to struggle to pay for their children's upbringing and education just so that they could have a "cushy middle-class" retirement when the kids are out of the house. That is the quote and justification one of the posters below used when explaining why it's okay that they get huge pensions instead of using their salary to save up for retirement like the rest of society.
I also think it should be adjustable depending where you are living. Do you live in the area and so plowing some of that money back in to the local economy? If not there should be a reduction.
England is reducing some benefits for those who live abroad and thus not spending money in the country.
Yes. Why not? Because that offends your sensibilities about work? Because you feel that people should work until they're 65~70 to retire, if they ever manage to? Right now a number of school teachers are working until their late 60s to make a pittance upon retirement, trading down from houses to mobile homes to even make their retirement manageable. Do you feel these people aren't as worthy as others making obscene amounts of money as they essentially raise the nation's children for them?
Your entire supposition either buys into the myth that there isn't enough to go around or worse, that you simply believe because we treat the majority of our labor pool like shit that anyone daring not to is in the wrong.
They got paid a salary their entire working career, which they should have been taking out of to save up for retirement. You know, like the rest of society does.
The city's benefit is that they don't have to pay as high salary as they otherwise would (without a pension); that means the city can take the money they save on salary each year, invest it, and hopefully get a high enough return that they save money compared to paying a full salary without the pension. Essentially, the city wants to borrow money from the workers at A% interest and then go invest it (maybe in itself, maybe in more traditional investments) and hopefully get an ROI of B%, where B > A.
The workers' benefit is that they get a "guaranteed" retirement fund (ie less risk) that they don't have to manage or worry about and depending on the circumstances, a higher total compensation than they would without the pension (ie the city pays them interest for essentially loaning the city money) (ie better returns).
If the city's investments of the saved salary money returns more than what is needed to fund the pensions, the city gets to keep that extra money.
For that matter, why is the city in the business of trying to make a profit out of peoples' pensions? And even then there was no accountability or repercussions for politicians that decided to dip their fingers into the pension investment pools.
And the last thing that I'd like to add in response. I think the reason why most people are shocked at this article, is because they've been conditioned and drilled with the thought that public servants are under-paid. But as you say, the public servants did this on "purpose" as a risk-mitigating process. If that's the case, then they need to stop yapping incessantly in the public sphere about how they're paid less in comparison to their private counterparts.
That's how capitalism works (under ideal conditions). Everyone tries to make the best possible deal for themselves, not just politicians.
> For that matter, why is the city in the business of trying to make a profit out of peoples' pensions?
For a multitude of possible reasons. Because the profit there can be used to reduce the tax rates. Because the profit can be used to pay for something that the city couldn't otherwise afford. Because the benefits plan allows them to more accurately plan future liabilities (compared to paying employees a market rate salary (that's not otherwise lowered by a pension) that floats up and down with inflation and the economy).
> And even then there was no accountability or repercussions for politicians that decided to dip their fingers into the pension investment pools.
Are you talking about embezzlement or about the city borrowing money from the pension fund? The first is illegal and an enforcement problem that's pretty unrelated to where the money was embezzled from. The second may or may not actually be a problem depending on the terms at which the city borrows the money. Regardless, that's also not related to pensions specifically, since the city can borrow money at stupid terms from anyone, not just the pension fund.
> I think the reason why most people are shocked at this article, is because they've been conditioned and drilled with the thought that public servants are under-paid.
That's because the public workers actually were underpaid compared to private industry workers when the deals were originally negotiated (even including the expected value of the pension). Over the years since then, private corporations have lowered the salaries they pay (usually by not keeping up with inflation as opposed to actual pay cuts, though that happens, too) most of their workers, so public sector jobs have become much more competitive.
> If [the public servants did this on "purpose" as a risk-mitigating process]'s the case, then they need to stop yapping incessantly in the public sphere about how they're paid less in comparison to their private counterparts.
I have a few problems with many of the implicit assumptions in this statement; specifically that there is an agreed upon way to value a pension, that there is an agreed upon way to value the value of the risk-mitigation of a pension plan, that there is little variation in the ratio of the total compensation public workers earn to a market rate salary across all government workers, that all government workers are yapping incessantly about being paid less than market rate when using total compensation instead of just salary (combined with the previous assumption: as opposed to just the ones that are currently underpaid), and that only the workers are benefiting (or that they benefit much more than the city) from such a deal.
On a side note, it's disappointing to see people want to drag the public sector workers down to a their (possibly only just perceived) lower level instead of wanting to drag themselves up to the public sector workers' level.
"The second may or may not actually be a problem depending on the terms at which the city borrows the money. Regardless, that's also not related to pensions specifically, since the city can borrow money at stupid terms from anyone, not just the pension fund." Well, I'm not sure about borrowing as such. But I was referring to politicians/finance committees using up the capital in pension funds, and then having to pay pensioners their pension yearly from new tax-money that comes in. So in essence, they destroy the buffer and end up just siphoning new funds into pensions that start maturing.
"Over the years since then, private corporations have lowered the salaries they pay (usually by not keeping up with inflation as opposed to actual pay cuts, though that happens, too) most of their workers, so public sector jobs have become much more competitive." That may be the case, I haven't looked at the raw data to refute that. But I'd add that perhaps the corporations lowered the salaries because of a slouching/badly performing market. In which case it's the rest of society that is subsidizing the now-cushy jobs of the public sector. On top of having to deal with their (possibly) under-paid jobs in the private sector.
"I have a few problems with many of the implicit assumptions in this statement; specifically that there is an agreed upon way to value a pension, that there is an agreed upon way to value the value of the risk-mitigation of a pension plan, that there is little variation in the ratio of the total compensation public workers earn to a market rate salary across all government workers, that all government workers are yapping incessantly about being paid less than market rate when using total compensation instead of just salary (combined with the previous assumption: as opposed to just the ones that are currently underpaid), and that only the workers are benefiting (or that they benefit much more than the city) from such a deal."
I agree with you to an extent on this point. We are making a lot of assumptions in this discussion, and we're clumping together disparate values to attempt a comparison. I'm probably not the person to debate with on the finer details because I will interpret most of these things from my anarcho-capitalist viewpoint of the state. So to me, generalizing things to what they actually are is much more meaningful than endlessly comparing apples and oranges within the complicated framework of the state.
"On a side note, it's disappointing to see people want to drag the public sector workers down to a their (possibly only just perceived) lower level instead of wanting to drag themselves up to the public sector workers' level." There are probably multiple things at play here regarding peoples' opinion of public sector workers. To me, at least, I see them as leeches of the state. They represent a class of individuals that are permanently dependent on leeching the benefits given to them by the state. They will fight tooth and nail for the benefits that they get from the state, to the detriment of society by preventing a possibly different form of governance from emerging. Now, don't get me wrong, these are probably good people that don't deserve to have their livelihood yanked from underneath them. But I am forced to acknowledge the fact that change is very very difficult because we have so many people reliant on (what I would view) very unnecessary benefits.
Instead, everybody treated pension funds like piggy banks, looted them, and now want to run away with the money with the "Oh they're so greedy."
That just makes it unaffordable much earlier - which is useful granted, but doesn't actually solve the problem.
Some of the stats I've seen claim that the US has trillions in unfunded liabilities such as these pension funds. Anyone have any concrete stats we can reference?
I'm not saying that I disagree with the North County Times of Carlsbad, California, but I think that most government pensions are not that generous. $30K/year is more likely, and those employees may not be entitled to Social Security benefits either.
http://www.cepr.net/index.php/op-eds-&-columns/op-eds-&-colu...
http://money.cnn.com/2013/07/23/retirement/detroit-pensions/