Originally posted at www.calpensions.com
By Ed Mendel

A new study done for a pension reform group says retirement benefits for California public employees are often two or three times greater than benefits in the private sector, where pensions and retiree health coverage are dwindling.

The study also found that contrary to the usual justification for higher public employee retirement benefits (lower pay on the job) average wages for comparable work are similar or slightly higher for public employees than in the private sector.

The value of retiree health coverage provided for public employees and their spouses and dependents, a benefit seldom found in the private sector, can exceed the total value of some private-sector retirement benefits.

Other things said to boost public pensions: generous pension formulas, early retirement at 50 and 55, annual pension inflation increases, and if a pension recipient dies continuing to pay a quarter of the pension to a survivor, with a $2,000 lump sum.

The study was done by Capitol Matrix Consulting (Mike Genest, Brad Williams and Jay Peters) for the California Foundation for Fiscal Responsibility (Marcia Fritz) under a $150,000 grant from an undisclosed out-of-state source.

As struggling state and local governments spend more of their deficit-ridden budgets on rising retirement costs, whether public pensions and retiree health coverage are too generous is part of the political debate.

Reform advocates and labor defenders can each find studies reflecting their views. In an appendix, the new study lists several studies showing that state and local government employees are overpaid, and several studies showing they are underpaid.

The foundation led by Fritz has proposed cost-cutting pension reform initiatives in the past, but was unable to get the funding needed to place them on the ballot. Fritz said she is now focusing on pension research and education.

A spin-off group with a different tax status, California Pension Reform (Dan Pellissier), is working on a pension reform initiative for the ballot next year. One plan being considered would switch new hires to a 401(k)-style individual investment plan.

What the new study adds to the pension debate remains to be seen. The study doesn’t deal with the main issue, rising government costs, or a conventional measurement of adequacy: How much of the job salary is being replaced by retirement income.

When Gov. Brown, for example, proposed a pension cut for new hires during his previous term in 1982, he argued that it was possible for a state worker to retire at age 62 with combined CalPERS and Social Security income exceeding pay on the job.

The goal of the new study is to compare retirement benefits received by state, local and federal government workers with the employees of large California companies and two reforms proposed by the foundation.

The methodology is a “present value” calculation of future benefits. It’s widely used in business and economics for comparisons. But for those unfamiliar with the technique, the process used to match the benefits may not be easily understood.

Here’s a key sentence from the study: “Results in this chapter show employer-provided retirement benefits in terms of their present (lump sum) value at termination of service, expressed in today’s dollars.”

The study said the method puts pensions, 401(k)-style plan balances, and retiree health benefits on to a “common basis,” while also capturing the value of pension inflation adjustments, survivor benefits and temporary supplements.

Different assumptions about the “time value of money” and other factors would produce different results, the study said, so the focus should be on the relative value of benefits under the different programs, rather than the dollar amounts.

On the other hand, the study has reader-friendly graphs for each of the scenarios used in the comparisons. A common theme is the short stack of benefits for the private sector, with the exception of short-term employees.

The study said one of the difficulties in making comparisons is that “pensions are disappearing from the private sector.”

About 87 percent of state and local government employees in the Pacific region have access to pensions, compared to 20 percent of private sector employees, according to U.S. Bureau of Labor Statistics cited in the study.

Six large California-based companies were used for the private-sector comparison in the study. Only Chevron employees hired before 2008 continue to earn benefits under a traditional pension.

A “hybrid” plan combining a small pension with a tax-deferred 401(k) individual investment plan is offered Chevron employees hired after 2007, Safeway employees and Northrop Grumman employees hired before July 2008.

Only a 401(k) plan is offered to employees of Cisco, McKesson, Qualcomm and Northrop Grumman employees hired since June 2008. In the comparison with government plans, the study assumes the 401(k) plans earn 7.25 percent a year.

But as critics of 401(k) plans note, investment earnings are unpredictable, leaving the individual at risk if money falls short during retirement. A government pension is guaranteed income for life, leaving taxpayers with the risk if earnings fall short.

One of the comparisons in the study is with private-sector pensions in the 1990s, before the era of cuts and freezes. A federal survey then found that the average private pension replaced less than a third of the salary of a 30-year worker retiring at age 65.

The study said a similar state worker currently would receive “more than twice that level” under a California Public Employees Retirement System pension based on a common formula providing 2 percent of final pay for each year served at age 55.

Retiree health care is provided for roughly two-thirds of state and local government employees. The study said the state and UC offer retirees coverage similar to active workers through age 64, followed by supplements at age 65 and over.

About 22 percent of private-sector workers were offered early retirement health coverage in 2008, down from 31 percent in 1997, according to Employee Benefit Research Institute figures cited by the study.

The decline may have been encouraged by an accounting rule change in the early 1990s. The study said companies have to charge expected post-retirement health benefits against earnings and disclose liabilities.

The state has not set aside money to pay for retiree health care promised current workers, an unfunded liability estimated to be $60 billion over the next 30 years. The state payment for retiree health next fiscal year is expected to be more than $1.5 billion.

The new study said teachers in the California State Teachers Retirement System earn less generous benefits than other California public employees. They do not receive Social Security, and many do not receive retiree health coverage.

But the study failed to note that a quarter of the teacher pension contribution (2 percent of pay from the total contribution of 8 percent of pay) was diverted into a Defined Benefit Supplement for a decade ending in January.

The supplement earns what the CalSTRS investment portfolio earns, with a guaranteed minimum based on the 30-year Treasury bond. Teachers also can invest the 6.2 percent of pay that would have gone to Social Security in tax-deferred plans.

A report to the CalSTRS board in June 2009 found that a teacher at age 63 after 34.5 years of service could retire with 103 percent of final pay, if they have the pension, the supplement and have put $100 a month into a tax-deferred investment plan.

The board was told the pension of the typical CalSTRS retiree is about 62 percent of final pay.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at http://calpensions.com/ Posted 5 May 11