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Thursday, October 27, 2011

Fun with pension math

(Convicted former Illinois Gov. Rod) Blagojevich stood to get a state pension of about $65,000 a year. If he loses that pension, he would be eligible for a refund of about $128,000 in personal contributions he made to the state's retirement fund. Blagojevich still can collect a $15,000-a-year federal pension for his six years as a congressman.... from Ray Long's story today, Blagojevich faces pension hurdle, loses law license

So he was a Congressman for six years (Jan, 1997 to Jan, 2003) when his salary was:

1997 $133,600
1998 $136,700
1999 $136,700
2000 $141,300
2001 $145,100
2002 $150,000

...or an average of about $140,500. To create a nest egg that would return $15,000 a year in perpetuity at, say, a 5% rate of return, he'd have had to have invested $300,000, or $50,000 a year for each year he was a Congressman.

The story further tells us that he made $128,000 in contributions to the state pension fund over about 10 years -- four as a state rep, six as governor. Let's say that his employer, the state, kicked in another $128,000 on his behalf to the pension fund. Total: $256,000.

To get a $65,000 annual return on $256,0000 you'd need to find an investment paying 25.4%

Now these are back of the envelope numbers and they don't include actuarial adjustments (pension recipients don't collect in perpetuity, obviously). I welcome recalculations and other tweaks, as well as attempts by anyone to justify this kind of largess.



Eric, I wrote a lengthy reply which was burped by my computer. Damn. Anyway, I think the right way to calculate this is to use an annuity which would mean he needed $189K at age 65, assuming 5% rate of return and life span to 85. This is because an annuity involves payments of both interest an principal such that the corpus is exhausted at the time of expected death. The calculation is performed in thirty seconds on any decent financial calculator, the preferred one for finance geeks like me being the HP 12C (not the premium one!).

However, I did some other back of the envelope calculations and, without going into detail, I'm guessing that even at the $189, he would have been underfunded, which is generally the case with government-operated (and a lot of private one) defined benefit plans. (Like Social Security.) This means that he wins and the taxpayer loses.

At least when fireman or policeman receive a generous pension one can argue that those folks risked their lives every day on the job and therefore deserve a more comfortable retirement. There is even an argument that teachers (at least in the past) earned less money annually in return for a comfortable pension.
But the pensions for our elected officials are totally out of whack/wack.

MCN covered what I was going to say -- that you need to look at an annuity since the pensioner's estate doesn't get any more payments once he dies. (Though my 401k will generate relative peanuts each year, when I die, whatever is left will go to my heirs.)

"I welcome [...] as well as attempts by anyone to justify this kind of largess."

Everyone else is abusing the system. Haven't you been reading your own newspaper the last few weeks.

Why are you singling out Blago?

ZORN REPLY -- He's illustrative.

@John - Actually, although I have not read every story, I do not see evidence in the Tribune that everyone else is abusing the system. I see stories about small numbers of people with power and/or political connections getting a lot of money from the pension system. One may or may not consider that "abuse" but whatever it is, it has little to do with the pension experience of most government employees. That does not mean the Tribune should not be covering these stories. It should be. However, when people get the impression they can generalize -- and I am not so sure giving that impression is unintentional for the Tribune -- that should be corrected. There are problems with the pension systems but they are different problems.

You are correct, JL, like when the Trib headlines say "educators" getting huge pensions, when in reality it's the few ADMINISTRATORS who get these big bucks, and the average teacher gets a relatively small pension (which they contributed at 8-10% and the state, fulfilling the part of the employee, or, rather, NOT fulfilling their part, has not kept up its end of the bargain), which is their replacement for Soc Sec, since they are not in that system. I hear continuously people saying "I don't get a pension, why should they", who don't understand that there's a difference between the company pension (replaced in many cases by 401Ks), and the Soc Sec system, or the equivalent - at least its supposed to be - which State employees have. And I have no axe to grind in this, I work for a private (non-profit) company. I do know a teacher or two, but I'm mostly about fairness.

This is a question for MCN, Greg J or anyone else who might know. I'm to receive a monthly benefit from my late husband's social security account for my daughter until she's eighteen, I will also receive a much smaller benefit for myself the next couple of years. Is this income taxable?

"...attempts by anyone to justify this kind of largess."

I don't want to involve the example of Blago specifically, but in general we want the pay and benefits that accrue to legislators to be *at least* as good as what talented and smart professionals make, because otherwise we will be actively excluding the talented and smart professionals that would be making much better money in the private sector (and maybe even can't afford to quit their job without reducing their standard of living), mostly leaving only those who are untalented enough they can't do better or those who are willing to take the explicit pay cut because of the access it gives them to graft and kickbacks.

Not that having good pay and benefits excludes those people, of course. A well-paying and well-perked legislative body is merely a necessary, not a sufficient, condition for attracting legislators who are talented *and* honest. (Aside from the outlier ideologues, of course.)


Teachers retire with 75 percent of salary and 3 percent raise per year. In my district, that means teachers with full eligibility--which is very common--are retiring under age 60 starting out at $60,000 or more a year. They might easily get $1 or $2 million over a lifetime. Compared to the private sector, I call that relatively large. And the math doesn't work for it either, even if the state is making its contributions. The expected rate of return on the fund is fiction. No system that pays people a salary-level sum for conceivably as many years as they actually worked can possibly add up.

The fact that most/all government employees don't get Social Security has been massively underreported, as has the fact that pension deductions are *more* than private-sector employees have deducted for Social Security. Also, the fact that the 2% payroll tax holiday this year (and possibly again next year) does nothing for government employees.

Every story this week about trying to identify John Wayne Gacy's victims has included the fact that he was executed, despite that being common knowledge and not directly relevant to the story. Stories (and, worse, opinion pieces) about government pensions almost never mention the fact that they are instead of Social Security, despite that being commonly not known and directly relevant to the story or opinion piece.

That is not to say that if people knew, there would be no need for pension reform. There likely still is but if we are going to have a public debate about that, let's try to do it with the facts.

JL- do you think that many people who are retired live ONLY on their Social Security benefits? From what my Mom tells me they are a mere pitance. I don't have official numbers, but I think that most people invest in a 401K and rely way more on that to provide most of their retirement income. We've covered this before in other threads.

Wendy C -- I don't know about whether the Social Security income is taxable or not, but I do work for a Social Security Disability attorney. And I'm sure he's well-versed in survivor benefits and dependent children benefits, if, at any point, you feel like you need some help with that or you're having issues with how things are going with your benefits.

Just want to help.

@Wendy: First, Wendy, I'm glad to see that you're back and I'd like to again extend my sympathy to you and your family for your loss. I know this is a very difficult time for you but please be aware that you have my prayers.

To answer your question: Maybe. The following link containing a 179 page IRS document which may be useful:


That was ironic: Of course it isn't useful. In fact, it's incomprehensible. However, page 26 contains a helpful worksheet for determining whether SS income is taxable. There are only eighteen steps and it shouldn't take you longer than forty five minutes to figure it out.

This is how bad it is:

Over 20 years of working, I have contributed over 200k to the Social Security system. I would give it all away, and renounce any claims to future benefits, if I could stop making future payments into the system. Seems like a pretty fair trade to me, but I'd never be allowed to do it -- because it's a Ponzi scheme.

And public pensions are way more insolvent than even SS.

Brian, maybe you contributed 200K, maybe not. I assume you counted both your and your employer contributions. If you didn't, you need to double that amount, plus add the foregone interest.

See how government makes things better?


Thanks for clarifying -- Yes, I counted my employer contribution (which in my case is also myself).

@MOPerina - And this is an argument for failing to report relevant facts because....

It seems to me that is a reason for those opposed to pension plans to want the facts known. But not really since it would kill the assumption that public retirees *also* get Social Security, limited as it may be.

JL: I've never understood why people who support union pensions note that govt workers aren't in Social Security, as if that is a hardship. Most of us would love to get OUT of Social Security. If you are self-employed, it is especially burdensome. Government pensions are way better than Social Security, not just in the amount but generally the retirement age. And those are indeed the facts.

I would have loved to have never been entitled to SS, and to have thus never contributed a dime. However, it will be that I will end up have paid many hundreds of thousands in SS taxes, and perhaps never get a dime in return.

Such is the way of government.

Beth, thanks for the offer.

Mike, thanks for the link, looks like you can be taxed if your base income is over $25,000. From what I quickly estimated, half of the benefits will be taxed, but I'll only be receiving a very small amount this year, they don't start 'til next month. Next year will be different. I can't believe how complicated the stupid worksheet is, why does the IRS make everything such a task? Why is death so complicated, and expensive? I'm trying to do as much of this as I can, myself; your and other's legal advice has been very helpful.

@quotidian - Show me the math that says Pension + Social Security < Pension. If you cannot, tell me the argument that says that (all else held equal), finding out that public employees do not receive Social Security makes people *less* supportive of pensions.

If you want to call for switching public employees to Social Security, do it. But that would first require cluing people in that doing so would constitute a change.

By the way, who is the "us" in "Most of us would love to get OUT of Social Security"? I am curious what polls you are reading that say voters are clamoring for it to be repealed or for the categories of workers covered to be rolled back.

@MCN - Have you looked at the numbers on poverty among the elderly since Social Security started? See how government makes things better? (No irony this time.)

@Brian (and Rick Perry and everyone else who likes to trot out the Ponzi scheme argument) - How many Ponzi schemes do you know that have lasted 70 years and are sure to last at least that much longer with a few adjustments -- producing positive effects as they go? Let's suppose I told you that I had a great idea for a company that was going to produce a useful product but, unfortunately, go bankrupt in 2151. I assume you would tell me to forget it because it is financially unstable, right?

Also, you are misunderstanding Social Security in at least two ways. First, it is partly redistributive. You may not like that politically but you know it, which means you are being disingenuous when you complain as a relatively high earner that it is a bad investment. Second, it is partly insurance. Do you go around complaining that you are getting screwed on your life insurance policy because you have put in all this money and not gotten a dime back?

JL: I have already put up the cold numbers. If you cannot digest that a career employee in the Illinois teachers retirement system, or most public-worker pension programs, is not doing about three times better in pension at retirement--in terms of their contribution versus what they collect, at the expense mostly of taxpayers not in the system--I can't do much more. You are just refusing to view the truth.

JL, you have clearly not run the numbers on SS for jamokes like me--and you, if you're being taxed for SS. You can also illuminate me on poverty rates amongst the elderly, why you think SS has helped or harmed them, and the basis therefore.

I'd like to know why the government isn't giving me the deal it give to elected politicians.

@quotidian: I am not sure what you just said -- which, in all honestly, may be me, not you -- but I am almost positive it has nothing to do with why you think it is a good thing that the press tends not to report that public employees don't get Social Security. Sorry, but you seem to be very intentionally ducking the question and answering the one you would rather answer. A + B > A, even if A is three times bigger than B. If people assume someone is getting A + B, they will be less inclined to support A and that probably is exactly the reason people opposed to pensions don't want the truth known. I am not saying it would turn people around. It wouldn't but it would affect their thinking about what changes to make. It would also be honest. All this "Put them in 401(k) plans" is wrong. At the very least, the plan would have to be, "Put them in Social Security and possibly *also* 401(k) plans."

One more thing for taxpayers to think about. The Social Security administration expects the employer share on time, every time. No more deciding not to pay your employees' retirement contributions because you're a little short this decade but you promise you'll catch up real soon.

@MCN: It turns out to be hard to find good numbers on poverty prior to the New Deal -- and even if I could, you would rightly argue that poverty across the board was higher during the Great Depression. However, it is generally acknowledged that it was much higher. The elderly used to be one of the groups most likely to be in poverty. They became one of the least likely. Numbers seem to become better available for about the last 50 years and depending what start and end dates one looks at, the percentage of the elderly in poverty drops by something like 1/2 or 2/3, if I remember correctly. There are reasonably avenues of attack on Social Security. Claiming that it failed at this basic purpose is not one of them.

Unless I have mentioned it at some point, you have no idea how much money I make but, yeah, Social Security probably is not a fantastic investment for me. Among the reasons, I invest pretty conservatively so I think (hope) my retirement savings are fairly secure. Not everyone does and that, by the way, is part of the reason Social Security may be a good investment for you, after all. You know politics enough to know that if people were completely on their own and any large number ended up broke at retirement, you probably would end up subsidizing them with your tax dollars. In that case, aren't you better off if the government makes them kick in some of their money, too?

The government isn't giving you the deal it gives to elected politicians because the elected politicians have voted themselves benefits they could not afford to offer the general public. Feel free to be infuriated but -- going back to my original point -- that has just about nothing to do with the vast majority of government employees without that sort of access to power.

Overall, I am not defending all aspects of the current arrangements. However, is it not fair to ask that voters have the correct information before making decisions? Blago and those union officials who worked one day as substitute teachers to qualify for a government pension ain't typical. Pensions are instead of -- and, yes, generally better than -- Social Security.

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